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Article
Beyond Aesthetics, Appraisals
BY LYNN MCALLISTER, PH.D.
(Article published in ARTIFACT magazine)
You just inherited an oil painting from your Grandmother and you need it insured. Your divorce is going to court next month and you need to know the value of your personal property. You want to donate a work of art to the Seattle Art Museum so you can take a tax deduction and the IRS wants to know what it's worth. You just became executor of a distant relative's estate and you need to know the value of the personal property for estate taxes or equitable property distribution to surviving heirs. Your mover dropped the box containing your prized set of Waterford crystal and you need a value for your insurance company.
You need an appraiser.
The appraisal or valuation process is an orderly step-by-step process which defines the problem and determines the work necessary to solve the problem. The data involved is acquired, classified, analyzed, interpreted and translated into an estimate of value. This process is concise and logical. It is a thorough procedure that leads to a supportable conclusion of value. Substantiated values are the basis of a professional appraisal. Should an appraiser be called into court for any reason, her best defense is to be able to produce actual documented values, or comparable values established through research.
An appraiser does not set values, but confirms values through research. For this reason, a verbal appraisal based on the appraiser's opinion will not hold up in court and cannot be used for insurance purposes. Therefore it is worthwhile to spend money on an appraisal that has been researched by a qualified appraiser. A "ball park" estimate of value can be way off base.
Personal property appraisals are often inadequate. Appraisals done by poorly trained, ill-informed, or careless appraisers can do more harm than good. An appraisal is only as good as the appraiser. An expert, professional appraisal protects against disaster for insurance, divorce litigation and federal tax for estates and donations.
The Internal Revenue Service has set the standard for the formal, written appraisal. According to these guidelines, the professional appraisal should contain the following sections:
1-Statement of purpose
2-Description of the object so thorough and precise that one can visualize the item without a photograph (although a photograph is still necessary). Descriptions should include: the dimensions, the title of the object, the artist/maker, a detailed condition report of the article, the medium, the historical associations, and general provenance, if it is important to the valuation and available.
3-A summary of the appraiser's qualifications.
4-Basis of value. Two different types of replacement costs can be used for evaluation:
A. Replacement Cost (new): The cost
necessary to replace with new materials if
like kind, quality and similar utility, at current
prices to the items being appraised.
B. Replacement Cost for Comparable Item:
The cost necessary to replace an item with a
comparable item of property of like kind,
quality, material, age, size, by the same artist
or maker, at current prices to the items being
appraised. This is the evaluation used for
works of art, antiques, and unique decorative
items.
5-A statement of disinterest indicating that the appraiser did not charge a fee based upon a percentage of the value, is not interested in buying the property, and did not sell the property to the client.
6-Date of valuation. For estates, the date of death. For other situations, the date of object examination.
7-A high quality, color photograph of the item (an absolute must to establish the quality and condition for the IRS, insurance and divorce litigation).
8-The signature of the appraiser and the date the appraisal was done.
9-The name and address of the client.
You should receive at least two copies of the appraisal. The appraiser will retain a third copy for his or her own files.
-An appraisal is simply an estimation of value based upon documented research of an object. The criteria used to determine the value of all collectibles is based on authenticity, condition, rarity, historical importance, provenance, medium, fashion, quality and subject matter. A qualified appraiser must constantly keep current with the fast-moving, complex world of art and collectibles. This requires an enormous investment in time and continued study to gain the highly technical knowledge needed to accurately assess values.
The value of an object in an appraisal can have several different meanings. Therefore it is important to be clear about the function of the appraisal and what the appraisal will be used for. The function of the appraisal will determine the type of value to be estimated. Fair market, retail replacement, depreciated replacement cost, liquidation and distress liquidation are some of the various types of estimated values that an appraiser might use. If you are unsure about your needs, discuss your situation with a qualified appraiser.
Appraisers are not advocates for any party and they do not set values. Appraisers are disinterested and objective and confirm values through research to find the "mode" price. This is defined as the most common, recurring value for an article. This evaluation should consider "spiking" high and low prices, regional differences, the quality and condition of an item, as well as the other criteria listed above.
Obviously, since estimated values are not absolute, why not try to get an inflated appraisal for a painting that you want to donate to a museum and take a big tax write-off? Who will know if you find an unscrupulous or uninformed appraiser who will set the value of your crystal vase at ten times its value, and say the cat knocked it over? Because of such inflated values, the IRS has established an Art Advisory Panel to evaluate donated property. In one past case, the IRS found an incorrectly attributed painting that had been appraised and deducted at 349,000 percent of its actual value. The IRS has also found that in past years the over-valuation of donated property has at times averaged approximately 1,000 percent of its actual value. For this reason, the IRS has toughened its penalties for both owners and appraisers of over-valued donations and, on the other hand, under-valued property for estate taxes.
Insurance companies have become aware of similar abuses, and as a result they may decide to dispute an appraisal when the claim is made, even though the value was accepted in the original policy. I have been hired to provide a third party, disinterested appraisal for insurance companies who questioned the valuation on the original policy and, conversely, by ombudsmen hired by the insured because of a denied claim.
An ethical appraiser is not going to cheat by inflating or deflating the value of personal property involved in divorce litigation. The appraiser must not know the husband or the wife. If so, they must disqualify themselves because they no longer meet the requirement of being impartial. In a similar instance, a gallery or dealer who has sold an item cannot provide the client with an appraisal to be used for insurance or IRS tax purposes, because they are no longer disinterested parties. The disinterested status of a professional appraiser is a very important asset for the client. For example, if you have an estate appraised, you do not want that appraisal done by a shop owner, gallery or dealer who will buy that inventory from you. That would be equivalent to asking the fox to guard the henhouse. Be sure your appraiser maintains a disinterested status.
Cheating is not worth the risk for you or your appraiser. You may end up having to pay legal fees, IRS penalty fines, have your insurance claim denied, or lose personal property or value in a divorce settlement. Your best defense is to hire a qualified, ethical, objective appraiser whose appraisal will stand up in court and who will provide you with an honest value based on the appropriate function for the personal property in question.