What’s It Worth? How Can an Asset Without a Market Be Valued at A Fair Market Value?

Steven K. Cannon has published his article, “What’s It Worth? How Can an Asset Without a Market Be Valued at A Fair Market Value?,” in the the Texas Tech Estate Planning & Community Property Law Journal where it is available for download. The abstract reads as follows:

When individuals die, their assets usually go to their beneficiaries in some form or fashion. However, if an individual dies with a large estate, the estate will be subject to a large federal estate tax. This estate tax is based on the value of the entire estate. Most assets—cash, stocks, bonds, jewelry, cars, and real estate—are easy to value. Issues arise, however, with the valuation of items that are more rare, such as collectibles, artwork, and guns. Rare items are harder to value because their markets are typically smaller.

What if someone in your family passes away with more than $1 billion in collectible pieces of art, and your family member’s estate sells a large portion of that art to pay the government more than $471 million in estate taxes? The art appraisers did not value the collectables higher, because, for purposes of the estate tax return, they valued one of the pieces at $0. Because that piece of art could not be sold legally, the appraisers valued the piece at $0. Then, the Internal Revenue Service (IRS) tells you that the piece of art is really worth $15 million. The estate stands by the $0 valuation from the three different appraisers, but the IRS then responds by increasing the valuation to $65 million, assessing $29 million in taxes for the item and $11.7 million in penalties for the misstatement on the return. Does this seem fair? Why must you pay additional taxes on an item valued at $65 million when legally, you cannot sell it?

This is precisely what happened to one of New York’s largest art dealers. The IRS used black market values to appraise illegal assets in the past. Another issue arises, however, with the black market of Robert Rauschenberg’s work of art, Canyon; after this estate tax fiasco, there is no black market for this artwork because it is so heavily watched by the government and media.

This comment will generally discuss the federal estate tax, as well as different valuation methods used to determine the value of an estate. Additionally, it will focus on the Sonnabend estate and the difficulties that have arisen regarding Rauschenberg’s Canyon. Finally, this comment will discuss the IRS and the estate, as well as possible solutions for an estate planner to address this problem.

Download full article at What’s It Worth? How Can an Asset Without a Market Be Valued at A Fair Market Value?.


Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.