How Do I Value Collectible Assets for Estate Tax Purposes?

Collections containing paintings, coins, jewelry, sculptures, antiques, books, vases, silverware and other valuables are often the culmination of a lifetime of effort, patience, persistence and a little luck. While valuable collections can be as diverse as their owners, one of the only universally shared components of all valuable collections is the method by which the Internal Revenue Service (IRS) requires them to be valued for estate tax purposes.

For estate tax purposes, collectibles are items of artistic or intrinsic value in excess of $3,000. If the estate holds collectibles valued in excess of $3,000, an appraisal must be filed with the return. The appraisal must be accompanied by a statement made by the executor, under penalties of perjury, that the list of collectibles is complete and the appraiser is qualified. Expert appraisers should be reputable and of recognized competency to appraise the particular class of property involved.

If the estate contains a valuable collectible worth $20,000 or more, the executor must include with the estate tax return the name of the artist, medium, place or origin, record of exhibitions, distinguishing features and physical condition, history, age and a professional quality photograph.

At times, the IRS has allowed discounts in valuing collectible assets, but only when the discount speaks to the condition or ownership of the collectible. For example, an estate was allowed a 5% discount where the decedent owned only 50% of a painting collection. The US Tax Court has also allowed discounts for assets that were dirty and needed cleaning, for assets that had begun to bow, and for assets with questionable attribution to the purported artist.

The IRS offers a procedure to request a Statement of Value to assist taxpayers substantiate the value of works of art. The procedure applies to works of art appraised at $50,000 or more and includes paintings, sculptures, watercolors, prints, drawings, ceramics, antique furniture, decorative arts, textiles, carpets, silver, rare manuscripts, historical memorabilia and other art-related items. A taxpayer is not required to request a Statement of Value, but if he/she does, it must be attached to the estate tax return, regardless of whether the taxpayer agrees with the IRS’s determination. The IRS monitors Statement of Value reports and analyzes discrepancies between the statement and the estate tax return when filed. The IRS charges a user fee of $5,700 for the first three items, plus $290 for each additional item.

The executor and taxpayer should not undervalue collectible assets in an attempt to lower the estate tax, as this could trigger the substantial valuation understatement penalty under IRC Sec. 6662(g). Additionally, the executor and taxpayer must take care not to overvalue the items in an attempt to establish a higher stepped-up basis for the beneficiaries. Overvaluing assets can seem particularly tempting to executors of nontaxable estates, but an intentional overvaluation of assets can also trigger accuracy-related penalties under IRC Sec. 6662(b)(2).

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