A Primer for Determining Fair Market Value of Estate Art, Antiques and Collectibles
Uncle Bob’s collection had to be reviewed to determine its Fair Market Value before the estate could sell it. What collections or antiques to you have in your house—or attic—that will need to go through a similar review? Do you know what a FMV would find for your collection?
Uncle Bob has always been proud of this vast collection of widgets. A world-traveler, Uncle Bob would invariably come across the most rare and interesting widgets in the oddest places. He always said that when he died, and those widgets were sold, it would bring in 10 times what he paid for them.
Unfortunately for Uncle Bob’s estate, when the formal appraisal comes in, that well-loved and expensive-at-the-time-of-purchase widgets in his collection are worth only a small fraction of what Bob paid for them. While the good news is that the low value of the widgets lowers estate tax burden, Bob’s heirs are stunned at the Fair Market Value determination. Mainly, though, they don’t understand how Fair Market Value is properly determined.
There are almost 250 sections of the Internal Revenue Code that require the stating of something known as Fair Market Value (FMV) in order to determine tax liability. In the auction world, FMV may be used to illuminate auction estimates for everything from Picassos to pearls. The nuances of determining Fair Market Value however, continue to cause confusion for collectors, tax court judges and even some appraisers. One judge has lamented, “value, like beauty, is in the eye of the beholder.”
Fair Market Value is a complex determination of value defined by the U.S. Federal government for tax liability assessment, be it estate tax, gift tax, or income tax. The “good book,” when it comes to FMV, is regulation Sec.20.2031-1(b). Many appraisers and estate attorneys can recite by memory the first part of this regulation:
“The Fair Market Value is the price at which property would change hands between a willing buyer and willing seller, neither under any compulsion to buy or sell.”
While this line is certainly from the right chapter, it is not the only verse, and it behooves us to look at the regulation in its entirety. Failure to consider the totality of the definition may lead to inaccurate valuations.
The regulation states that that FMV is not to be determined by a forced sale price. So, while the government considers the sales price of tangible estate assets to be the most probative evidence of its Fair Market Value, the relevant regulation recognizes the owner’s right not to sell, due to the benefits attendant to retained ownership. Fair Market Value, therefore, can describe the value of property unsold. Without an actual sale price determining FMV, appraisers typically rely on the Market Comparison Approach to arrive at values.
This appraisal method entails determining FMV of an object by relating it to the past sale results of items with similar qualities. These “comparables,” as they are called, must share something in common with the subject property, such as maker, size, age, material and condition. However, hand-made objects such as paintings and fine antiques can make finding diagnostic comparables difficult and subjective, due to the unique nature of such objects. Other factors, such as provenance (ownership history) and vendor status (e.g. high-end gallery) are equally unscientific, yet may impact value, as well.
The sale of such qualitative comparables must also have occurred in a relevant marketplace, that is, where such property is generally obtained by the public in a retail market. The regulation cites a theoretical example of a used car having a FMV equal to what a used car with comparable qualities could cost at a member of the general public if purchased from a used car dealer, a typical marketplace for such an item. It is critical to note, that FMV should not be determined by the amount garnered from the sale of such a car to that theoretical used car dealership, but rather from the cost to purchase a comparable one.
Determining the appropriate marketplace for a piece of tangible property occurs on a case by case basis, as no one marketplace necessarily qualifies a priori. Retail transactions, which involve the ultimate consumer, occur at dealerships, stores and auction houses. However, wholesale transactions occur in all of these venues as well. Both layers of the marketplace may operate simultaneously, as determined by the nature of the property and the status of the buyer. What a jewelry dealer pays for a diamond from an importer could not be taken as the Fair Market Value of the same stone after it has retailed to the general public. Or, to cite one example one used by one court, the FMV of a head of cattle cannot be used to determine the FMV of a cow’s worth of steaks at the supermarket.
Finally, the market comparison approach is predicated upon sales of comparables within a reasonable length of time prior to the appraisal date. Stale results, too old to illuminate the current market, may not be relevant, nor is anticipation of future value typically allowed, as such predictions are inherently unknowable and unreliable.
The Appraisal Foundation, a not-for-profit organization authorized by Congress, was created in 1987 to support the appraisal profession by creating method standards and codes of ethics. These are codified and published in the Uniform Standards of Professional Appraisal Practice (USPAP). All the major appraisal organizations, such as the Appraisal Association of America (AAA) and the International Society of Appraisers (ISA), require adhering to USPAP a requirement for membership.
Critical to the understanding of Fair Market Value is its inherent subjectivity, which even the Appraisal Foundation acknowledges. According to the Uniform Standards of Professional Appraisal Practice (line 162): “Value expresses an economic concept. As such, it is never a fact, but always and opinion of the worth of a property at a given time in accordance with a specific definition of value” (my italics).
Following the complete definition of Fair Market Value defined by the Treasury Department and the tenets of USPAP helps keep this problematic process of determining Fair Market Value manageable.
Matthew S. Wilcox is the vice president for trusts & estates at Freeman’s Auctions in Philadelphia, Pa. A graduate of Bowdoin College, he holds a Master’s degree in Art History from UNC-Chapel Hill and a Graduate Certificate in Museum Studies from George Washington University. An accredited member of the Appraisers Association of America and an active estate appraiser, Matt speaks and writes frequently about the art and appraisal profession at estate planning councils, tax groups and bankers associations.
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