Handling Life's Unexpected Events by Tim Luke

Being prepared for the curve balls life throws your way involves understanding when to appraise your jewelry, fine art, or other tangible personal property. It is equally important to recognize when an old appraisal needs updating. What are the differences between appraisals? It is essential to know the variations between the types of appraisals and which one is required for specific life events to answer this question.

Before we jump into appraisal examples, it is also valuable to understand the training and experience of the appraiser. There are requirements for personal property appraisers and guidelines for tangible personal property appraisal reports. In short, the appraiser should be competent to appraise the jewelry, fine art, or other tangible personal property in the appraisal assignment. This competency consists of familiarity with the items being appraised coupled with incorporating the Uniform Standards of Professional Appraisal Practice (USPAP) into the appraisal assignment. Appraisers need to be active participants in the marketplace, keeping their fingers on the pulse of the ever-changing market. Continuing education and membership in a professional appraisal organization are also essential elements for the personal property appraiser.

Below are examples of frequently encountered scenarios that best illustrate the differences between the two most common types of appraisals. The situations describe the life event that triggers the need for an appraisal report. It is impossible to cover every case when a tangible personal property appraisal report would be needed. Having been in the auctions and appraisals business since 1990, these are two of the most commonplace, illustrating the life event, the type of appraisal required, and an explanation of the importance of the service.

Scenario 1 - Insurance Appraisal

You are a contemporary art collector and live in Palm Beach, Florida. Hurricane season for the region is from June 1st - December 1st. As your collection grows, so do the liability and chances for loss or damage. Your insurance agent states, “You need an insurance appraisal for the art collection to establish the replacement value for the items.” The first step is to find an appraiser to evaluate the fine art and put together the appraisal report. To understand the appraiser’s process, it is critical to recognize the definition and considerations in determining replacement value. The International Society of Appraisers defines replacement value as “The amount it would cost to replace an item with one similar and like quality purchased in the most appropriate marketplace within a reasonable amount of time. Replacement value includes the costs of acquiring or replicating the property and all the relevant costs associated with replacement. These other costs may include all applicable taxes and duties, framing, crating, and transportation.” This definition helps steer the appraiser to the proper marketplace. The retail market is usually where the client can immediately replace the items with an exact or comparable item. The definition also informs the appraiser and collector of what additional elements are included in determining replacement value. This includes the value of the work itself plus the costs for framing, matting, shipping, commissions paid, or sales tax that would be incurred if the asset needed to be replaced. Insurance appraisals are just for that function. They provide replacement value for the assets in case of loss, theft, or damage. Because those values include more than just the asset’s value, insurance appraisals are not relevant for other types of life events, like a loss of a spouse or parent.

Scenario 2 - Estate Appraisal

A loved one passes away unexpectedly, and there is a jewelry collection. Do you know if the collection is fine jewelry with diamonds, emeralds, and sapphires, or is it all costume jewelry? Your tax advisor suggests you need a tangible personal property fair market value estate tax appraisal. You will need to find an appraiser who is knowledgeable in appraising the “stuff” in the estate and distinguishing the fine jewelry from the costume. The methodology in determining fair market value for items in an estate is to evaluate comparable sales of property found in the auction market, as this is the principal market of open exchange that provides publicly accessible sale records. To appreciate what is considered
in a fair market value appraisal, let’s look at the definition. The IRS definition of fair market value states, “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.” This part of the definition advises the appraiser to look at markets that have informed and willing sellers and buyers. The definition continues, “The fair market value of a particular item of property is not to be determined by a forced sale. Nor is the fair market value of an item to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate.” This part of the definition steers the appraiser to the most typical market where the items are sold to the public. Most valuable items are typically sold at local, regional, or international auction houses. All fair market value appraisals also consider Technical Advisory Memorandum 9235005 (May 27, 1992), which states, “Fair market value should include the buyer’s premium.” This means that the hammer price plus the buyer’s premium becomes the fair market value for an item. The appraiser must consider this information when determining the fair market value. The value determination for an estate appraisal only considers the asset and does not include the extras listed in the insurance appraisal scenario. This is why an insurance appraisal could not be used in the estate situation. The markets researched are very different and may produce vastly different value conclusions.

In summary, appraisals provide relevant information based on the life event to make informed decisions
about the assets. Knowing the difference between the most common appraisals will also help you plan for life’s unexpected events. It is never too early to obtain an insurance appraisal for your collection or engage the services of an appraiser to conduct an estate tax appraisal for the items in your estate.

Please visit https://hindmanauctions.com/services/appraisals-valuations to learn more about Hindman Appraisals and how to get in touch with our exceptional team of trusted appraisers.