What do equipment appraisers have to do with estate planning? That's a
good question and one with multiple answers. The fact is, some of the
largest equipment appraisal projects are generally estate and or gift
appraisals and much of an equipment appraisal practice can be engaged
with estate planning in one form or another.
The IRS has a lot to do
with that. Whenever a taxable estate* includes equipment, an equipment
appraisal will be needed. The IRS recently resolvedthe phrase qualified
appraisal" as meaning a USPAP-compliant appraisal; this, in combination
with the recent IRS crack-down on abusive estate appraisals, has
stressed the need for estates to use accredited appraisers. The days of
values dependent on a "one-sheet wonder" from an equipment dealer or
auctioneer are over.
Two of the most important estate planning issues
a machinery and equipment appraiser can address during estate
valuations are absorption and installation costs.
Absorption
Many
estates have a large number of similar types of equipment. When is it
appropriate to use absorption (AKA blockage) for appraisals that will be
used for estate planning?
Example: An appraisal for a law firm
acting on behalf of a large family farming operation for gift tax
purposes. The equipment to be valued included nearly 100 tractors. It
was important to consider what the effect on value of an individual
tractor on the market would be if it were released for sale along with
100 very similar tractors. By doing so, the equipment appraisal saved
the taxpayer a significant amount of gift tax by using blockage in an
appropriate and properly documented manner.
Installation Costs
When
estates include a large amount of installed machinery, it's important
to determine when it's appropriate to include shipping, installation and
permitting costs in the related appraisal, keeping in mind that these
associated costs often provide more than half of the value for installed
machinery.
Example: Valuation with a Business Valuation appraiser on
an estate including a recently upgraded factory. In this scenario, the
appraisal is generally for Fair Market Value in Continued Use, which
assumes that the earnings support the values. In this case, however, the
upgrade included a significant design flaw - resulting in an annual net
operating loss - so that the earnings of the factory did not support
the values. Instead of using the typical definition of value, the
equipment appraiser provided research and the proper documentation to
rationalize and support the appropriate definition of value.
These
two examples are certainly just a small sample of the specific estate
valuation issues that equipment appraisers routinely experience.Two
prevalent concerns these days include the economic obsolescence factors
of CARB diesel emissions regulations and the financially influenced
dilemma of under-utilized processing facilities. And of course, there
are many other issues involved in equipment appraisals for estates that
are not directly linked to current conditions.
Surprising enough,
then, it turns out that an equipment and machinery appraiser - while
perhaps not as regularly involved in estate planning as some lawyers and
economical planners - can be actively involved in estate planning. And
we can often contribute a unique perspective to the estate planning
community.
*The exact dollar amount that describes a taxable estate
can vary from year to year. Be sure to contact your tax expert for
up-to-date regulations.
Jack Young, ASA, CPA, is an Approved Senior
Appraiser (ASA) of the American Society of Appraisers specializing in
machinery and products and owner of NorCal Valuation in Northern
California. Jack is active in the Northern California/Nevada Chapter of
the ASA and currently serves as Vice-president of the chapter.
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