When a person passes away, their estate goes through probate and assets are distributed to heirs. As part of this process, an estate tax return may need to be filed with the IRS depending on the size of the estate. For estates above a certain threshold – $12.06 million for individuals and $24.12 million for couples in 2022 – estate taxes will need to be calculated and paid.
A key part of the estate tax calculation rests on the fair market value appraisal of all assets included in the taxable estate. This is where an experienced business appraiser becomes invaluable in navigating the complex process and helping save money through accurate valuations.
Why Appraisals Matter for Estate Taxes
The IRS relies on accurate estate asset appraisals to determine what tax is owed. Undervaluation can trigger audits and overvaluations increase the tax burden unnecessarily. A certified appraiser has the expertise to assign defendable values to business interests, real estate, collectibles, and all other assets that may have subjective valuations. This helps fully comply with estate tax law and avoid penalties on taxes owed.
Who Qualifies as a Business Appraiser?
A qualified business appraiser (QBA) is credentialed by one of the professional appraiser organizations. This includes designations such as Accredited Senior Appraiser (ASA), Certified Valuation Analyst (CVA), and Accredited in Business Valuation (ABV). These professional credentials indicate extensive training in valuation methodology, IRS regulations, business financials analysis, and appraisal report writing. Essentially, the QBA does more than guess at asset values – they have the skills to conduct a thorough evaluation process that will withstand scrutiny.
Key Tasks in the Appraisal Process
In the initial consultation, the appraiser will go over the engagement process, verify credentials, discuss access to records needed to value the business or other assets, and outline the timeline for the valuation.
The appraiser will then gather financial statements, tax returns, contracts, business plans, and any other documentation needed to understand the context of the assets and relevant market conditions. Interviews may also provide additional information.
Using professional standards and IRS guidelines, the appraiser will conduct financial modeling, ratios analysis, comparisons to other businesses, and employ multiple valuation approaches. This leads to a defensible fair market asset valuation.
The detailed findings and opinions will be compiled into a written estate tax appraisal report. This will contain descriptions of the assets, explanations of valuation methods used, market research, discussions of assumptions, and a certification of the determined value. Appraisal reports become part of the permanent estate tax records.
Why Hiring a Professional Matters
While software exists to estimate business valuations, nothing replaces the judgment and first-hand research of credentialed appraisers. They understand IRS rules and legal precedence to avoid missteps. This expertise saves substantial money and headaches if the estate tax return is ever challenged.
Rather than roll the dice with questionable asset values that could trigger audits and penalties, hire accredited appraisers specializing in business, real estate, and other estate assets. Upfront appraisal fees pale in comparison to the estate taxes that could have been avoided with accurate reporting. Let qualified financial professionals pay for themselves many times over by mastering the intricacies of estate tax appraisals.
