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 assignments are typically estate and or gift appraisals and much of an equipment appraisal practice can be involved 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 clarified the phrase qualified appraisal” as meaning a USPAP-compliant appraisal; this, in combination with the recent IRS crack-down on abusive estate appraisals, has emphasized 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.
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.
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 justify and support the appropriate definition of value.
These two examples are obviously just a small sample of the specific estate valuation issues that equipment appraisers routinely encounter.Two prevalent concerns these days include the economic obsolescence factors of CARB diesel emissions regulations and the economically 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 attorneys and financial 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 defines a taxable estate can vary from year to year. Be sure to contact your tax expert for up-to-date regulations.