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Probate and Estate Administration: Valuation of Rare Collections

Whether rare books, antiques, Impressionist art, or baseball cards, many people enjoy collecting as a hobby. Rare collections raise the important issue of valuation when the collector dies and his or her estate must be assessed. Appraising a collection of old sewing machines, a collection of stamps, or the works of an obscure French painter living at the turn of the past century can be a complex endeavor. Yet, arriving at a logical and reasonable determination of value for these rare collections is exactly the type of determinations required of the executor of a collector's estate. "Rare" simply means collections of unique, extraordinary, or infrequently found items, which is precisely why valuation of such collections is so difficult.

Why is Valuation Necessary?

While valuation of a collection may be difficult, it is necessary for a variety of reasons. One such reason is to determine the appropriate amount of taxes chargeable to the estate at the collector's death. An estate tax is one imposed on the right to transfer property at death. This tax is a charge to the collector's estate no matter how that estate is ultimately disbursed. For this reason, the estate tax is levied on the collector's estate and not on the heir receiving the property. The estate tax is based on the value of the entire estate, minus any proper deductions. When probating the collector's estate, the value of his or her collection of "rare" items must be included in the overall value of the estate for tax purposes. A second reason for the need to place a value on a collection of rare items is in case the executor must sell the collection. A sale might be required to help pay creditors, taxes, or administrative expenses due on the estate. Thirdly, the donation of the collection to a charitable organization requires that the executor determine the amount taken as a tax deduction.

IRS Rules for Valuation

An owner's ascertaining the value of any rare collections while he or she is still alive can reduce the burden on the executor and minimize the executor's fees. However, owner valuations must follow the Internal Revenue Service's (IRS) specific rules for determining acceptable values of rare collections. Unfortunately, these rules are difficult to apply, and often owner's valuation determinations are influenced by emotions for the collection rather than factual justifications.

The rules that the collection owner must follow are essentially based on the "fair market value" model. However, as noted above, it is very difficult to apply this standard to unique or infrequently found items, and the collection owner has the burden of proving that his or her determination is correct.

Fair market value is defined as "the price at which the property would change hands between a willing buyer and a willing seller, where neither is under any compulsion to buy or sell and both possess reasonable knowledge of the relevant facts." In other words, if the collection were to be offered on the open market, and neither buyer nor seller were being forced into making a deal, what price could one expect to get for it given open market competition from similar collections being sold at that time?

Herein lies the problem; it is very difficult to find competition from similar collections currently being sold when the collections themselves are rare. For this reason, the IRS has made many reference materials available to collection owners to assist with determining fair market value. These materials include, but are not limited to, textbooks, bibliographies, catalogs, and dealers' price lists.

The IRS also sets strict guidelines for obtaining acceptable appraisals. The guidelines state specifically that they are appropriate for unique properties such as art objects, literary manuscripts, antiques, etc., with respect to which the determination of value often is more difficult. The "laundry list" of facts to be detailed in the appraisal includes a complete description of the object(s), a narrative of the collection's history - including proof of authenticity, a photo of the collection, the cost, date, and manner of acquisition, etc. However, after all is said and done, the collection owner still is obligated, personally, to make a good-faith investigation of the value of his or her property.

Once the collection owner dies and his or her estate enters the probate process, there is no longer a requirement to obtain an appraisal in order to determine the collection's value for purposes of estate tax or sale. Even so, if an appraisal was obtained while the collection owner was alive, the chances of an IRS challenge to valuation are greatly reduced. Valuation disputes with the IRS can be extremely costly and time-consuming. And, although the IRS will provide a written explanation in the case where it makes a valuation determination that is different from that of the collection owner or executor, it is best to avoid this step in the process of valuation all together.

Expenses Involved in Selling a Collection

There may be considerable expenses associated with selling a collection through probate. Chief among these often is the commission charged to the estate by the selling agent. Courts vary as to whether or not these commissions and other expenses of the sale are allowable as deductions on the estate tax return. Decisions have turned on the issue of whether or not the expenses were "necessary" and, in turn, on the definition of the term "necessary" itself. Executors in some jurisdictions have argued that they should be allowed to deduct all commissions and expenses where sale of the collection was "necessary" in order to preserve the estate or to pay estate taxes. In other jurisdictions, the term "necessary" is simply given to mean "reasonable and proper." The ultimate value of a collection may play a part in a determination of whether or not commissions and other costs of sale are deemed "necessary" and, therefore, deductible on the estate tax return. A qualified attorney with knowledge of such jurisdiction issues is the best asset to have in such a situation.