The Ultimate Guide to Estate Planning Appraisal for Real Estate Properties
Recently, a beloved Canadian reached the milestone age of 90, joining a group of more than 2 million strong south of his native border. It is a group of increasingly vibrant – “and growing” – individuals with many estate planning appraisal and real estate planning needs for multiple properties.
No, we’re not talking about Jim Carrey; he’s 59. We’re also not talking about Justin Bieber. He’s not even 30. We’re talking about none other than Captain Kirk himself (or, if you prefer, the Priceline pitchman) William Shatner. While his addition to the coveted 90-year-old club is welcomed news for nonagenarians and their families alike (not to mention his rabid fans), the logistics of that longevity include some serious discussions over estate planning. As people live longer than ever before, they are increasing the time they have to add to their property and wealth accumulation. Estate planning and real estate planning can feel daunting at first (especially if your list of assets is galaxy-stretching long like a certain Starfleet captain), but it doesn’t have to be.
The following guide walks readers through all the definitional terms involved in the estate planning and real estate appraisal process (also referred to as an appraisal for estate planning purposes) and how best to prepare when, eventually, we will all boldly leave this Earth.
How Are Real Estate Appraisals Related to Estate Planning?
Without a doubt, the death of a loved one can be one of life’s most challenging events. Operationally, it triggers a series of legal processes necessary to reallocate ownership of assets and belongings from the deceased to their beneficiaries. This process is known as settling the estate; the estate being the sum of these assets and belongings. Assets can be financial, such as bank accounts, or non-financial, such as art, jewelry, motor vehicles, and commercial or residential properties. Settling an estate usually requires probate, the legal process reassigning ownership from a deceased person to their living beneficiary performed in court. Whether an estate goes through probate depends on the planning performed by the person who has passed. Two primary estate planning methods come in the form of a trust or a will, drafted before passing away.
What Is the Difference Between a Trust and a Will, and How Does That Relate to Probate?
A trust is a legal entity for the transfer of assets from the grantor to the beneficiary. A designated trustee executes the transfer once the grantor has passed. This role is equivalent to the executor role when discussing a will or probate. There are two main advantages of setting up a trust: alleviated taxes and the avoidance of probate. Trusts act as a bucket that transfers assets without having to go through the probate process. Depending on the type of trust, a trust that includes property can be appraised when it is set up or once the grantor has passed.
A will is a legal document that outlines final wishes after death, such as guardianship of children and asset distribution. Similar in function to a trust, it also identifies an executor and beneficiaries to transfer the estate. One of the most critical differences between a will and a trust is the probate process. Trusts are usually set up to avoid probate. The court is usually not involved in executing final legal wishes when a trust is the primary estate plan. In the absence of a trust, an estate will go through probate once someone has passed, even if they have a will. The probate process is the legal process involving courts that reassigns ownership of properties, belongings, and assets from deceased to living. During the probate process, the valuation of the estate is performed at the time of death. If there are commercial or residential properties, the probate process typically requires a real estate appraisal.
Probate can be a lengthy and tedious process, so most people want to avoid it if possible. The level of planning performed before passing away ultimately determines how efficient or complex the distribution of belongings will be. A critical piece of the probate and estate valuation process determines the value of everything within the estate. As mentioned, settling an estate that includes properties requires a real estate appraisal at the time of the decedent’s death. This task is more straightforward when the real estate valuation is performed shortly within the time of passing. However, in complex situations where complications are met, and the process is delayed, a retrospective appraisal of the real estate may be required.
Importance of Estate Planning Appraisal of Real Estate Properties
Real estate is usually a large chunk of the overall estate. The primary reason for the importance of real estate appraisals is that they can decide estate taxes. Federal and state-level estate taxes exist at a certain threshold. For 2021, the federal estate tax is only levied on estates over $11.7 million and $23.4 million for single and joint estates, respectively. This cap is adjusted for inflation each year. The federal estate tax involves tiers between 18% to 39% for the first million exceeding the cap, and a flat 40% beyond that. Seventeen states carry an estate tax that goes as high as 20%. The caps for estate taxes by the state are smaller, ranging from $1 million to $7 million. Estate taxes are sometimes referred to as the “death” tax or inheritance tax.
Yet it can be wasteful too, along with a high failure rate, not to mention stressful and a potentially massive drain on time and resources that could be put toward other uses. Ask yourself, do you really want to be beholden to a myriad of day-to-day management challenges ranging from serious to trivial, multiplied over numerous properties? In this case, the expression “work on your business, not in your business” couldn’t be more accurate.
If the properties include the following, each must be valued separately:
- Ranch or farm
- Farm equipment
- Growing or harvested crops
The same estate planning appraisal rules apply to businesses; they are all separate entities that must be appraised independently.
Estate Value and Creditors
The estate pays off creditors and transfers assets over to beneficiaries. With properties being a determinant of the estate’s total value, the real estate appraisal could determine if there’s enough to cover outstanding creditors or anything to bestow onto beneficiaries.
Four Must-Have Qualities in Your Real Estate Appraiser or Estate Planning Appraisal Firm
Regardless of whom you hire for your estate planning appraisal – be it a commercial real estate appraiser or an estate planning appraisal company – it’s important that they meet the following qualifications.
- Reputable; someone with a track record and locally recognized
- Independent and not contracted with any party, institution, or broker
- Accredited; abiding by a code of ethics and the Uniform Standards of Professional Appraisal Practice (USPAP)
- Experienced in estate planning or “date of death” (DOD) appraisals
The IRS has clearly defined standards that must be met for the appraisal. Also, given the context of appraising retroactively, an additional technicality is layered onto the calculation process. The appraiser must be experienced as the estate planning appraisal will become the basis for determining estate taxes and how much there is to distribute amongst beneficiaries. An experienced appraiser should be able to deliver the assessment on paper or in electronic format.
Information Necessary To Perform the DOD Appraisal
The appraiser will have professional-grade access to historical market statistics, construction data, the cost to build, and comparable sales records. These factors provide a rough range for the value of each property in general. More information is necessary to hone in on an accurate valuation about the date of death. These include:
- The owner’s official date of death on the death certificate. This gives the appraiser the date and timeframe for researching market conditions.
- Your availability for conducting the appraisal. Both the interior and exterior of all the decedent’s properties must be inspected.
- Any records that count help authenticate the property’s condition around the date of death, such as deeds, inspection reports, leases, rent rolls, income statements, or photographs. Some of these reports will be publicly accessible, but it’s easier for the appraiser if you consolidate all of the material that exists to your known knowledge.
- Any modifications to the estate since the date of death. Ideally, the properties are preserved with pending scheduled changes for after the estate is officially settled. The appraisal of the properties need to be performed for the conditions on the date of death. Any alteration changes the property’s state at the date of death, adding complexities for arriving at an accurate value calculation. Furthermore, the risk of contestation lingers until the estate is officially settled. For example, the appraisal value could be contested by one party involved or rejected by the court altogether. It is safest to preserve all properties until the estate is settled.
- The deadline for the estate planning appraisal. Retrospective appraisals could be niche expertise in your county, and the appraiser could be flooded with requests. Get ahead of their workload and set a deadline for your appraisal.
- Your attorney or CPA’s contact information to deliver the estate planning appraisal or even have your appraiser coordinate with these legal professionals directly on your behalf.
When Should You Start the DOD Appraisal Process?
The short answer is as soon as feasibly possible. It can become more challenging to preserve and appraise the properties the longer you wait. Of course, given that there is some groundwork involved in gathering materials for your appraiser, ensure that you have a 3-6-month window of availability to dedicate your time and attention. The estate planning appraisal will need to be communicated to the courts, the IRS, and your attorney and CPA. Usually, an ideal time to start the DOD appraisal process is within the first three months of the death after the probate has been petitioned.
What Does the Probate Process Look Like?
The probate process includes multiple parties and the court of law. It is a multi-step process that requires review at every step. Due to the complexities, it can be a very lengthy process. Below is an abbreviated timeline for settling an estate through probate, where the real estate valuation is just a small piece at step five:
- Petition for probate is filed
- Issue of duties and orders (where the executor and beneficiaries are identified)
- Notice to creditors
- Notice to the department of health services
- Estate inventory and appraisal
- Pay off debts and creditors
- Pay taxes (state and federal)
- Hearing on petition for final distribution & accounting
- Distribution of assets
- Final distribution and conclusion
Probate is seldom a straightforward process, and hiccups occur along the way. One of the incentives for setting up a trust is to avoid a drawn-out probate process’s uncertainty. Potential factors that could delay or prolong the probate process include:
- Failure to notarize or prove identity on the will; lacking a self-proving affidavit
- The decedent moved across state lines and purchased real estate while failing to update their will. The will may not hold in court if the laws of the new state substantially differ from the former.
- There are multiple wills with multiple law firms
- Contest to the appraisals of certain items in the will
- Beneficiaries contest the will
- No beneficiaries are listed, in which case the state appropriates the assets
‘Go Boldly’ and Call Us Today for Your Estate Planning Needs
The next time you need expert advice for a real estate appraisal, especially during the estate planning process, contact The Robert Weiler Company. For more than eight decades, our team has assisted investors, buyers, and sellers in countless commercial real estate transactions throughout the Columbus, Ohio region, and beyond. We know the industry, and we deeply understand the Central Ohio commercial real estate market.
While it’s difficult to predict the estate planning needs of the 23rd century, what is abundantly clear is that as evidenced by William Shatner – and millions of others – expanding life expectancies will continue to push the boundaries of what’s possible. As such, an extended life means a long list of property purchases, wealth accumulation, and related financial achievements.
“Live long and prosper,” might be the famous line from the favorite franchise. But for those who are tasked with settling the estate planning and real estate planning needs of someone who has recently passed, a more complete quote might read: “Live long and prosper – and pass on your assets to the people you love with ease.”
(It may not be the perfect 4-word quote long associated with Star Trek lore. But, it certainly is “logical.”)
The Robert Weiler Company prides itself on precision, expertise, and reliability. That’s why every commercial real estate appraisal, property valuation, and commercial appraisal review is handled with the same “logic” as well as unparalleled meticulousness and transparency. Not to mention that The Robert Weiler Company follows best practices created by Fannie Mae, Federal Housing Authority (FHA), International Valuation Standards (IVS), and the Uniform Standards and Appraisal Practice (USPAP).
To speak with our commercial real estate appraisers regarding your estate planning appraisal needs, call 614-221-4286.