The death of a family member or loved one is a difficult time, no matter the circumstances. After losing a cherished relative, the last thing anyone wants to think about is administering the estate. Your focus is on your family and on grieving the loss—and rightly so.
Unfortunately, these strong emotions often precede bewilderment as you realize the many financial and legal steps that follow in the wake of a loved one’s passing. If you know you will be named the executor or trustee of one of your family members, the time to start learning about them is now, before their passing.
Knowledge about these legal steps before bereavement strikes can be invaluable when it comes time to navigate a hard time following a loved one’s death. Although most of these steps are simple, others can be time-consuming and intimidating.
Learning about the process, in concert with expert legal advice, can help you execute your responsibilities correctly and with confidence.
One of the most important requirements to become familiar with is the Date of Death Appraisal, as it must be compiled soon after the passing of a decedent with real estate holdings.
In this article, Nick Gioia with New Era Appraisals breaks down the Date of Death Appraisal, including:
1. What is a “Date of Death Appraisal?”
2. Tips for Hiring the Appraiser
3. Things to Consider
4. Information the Appraiser Needs
5. Nuances of a Historical Appraisal
1. WHAT IS A “DATE OF DEATH APPRAISAL?”
The Date of Death Appraisal, also called a “date of death valuation,” is a real estate appraisal and a key component of the accounting of the worth of the estate required by the federal government.
The Internal Revenue Service (IRS) lays out a list of requirements pertaining to deceased persons and their estates. These requirements need to be fulfilled by the surviving spouse, executor, estate administrator, or other legal representatives.
The IRS recommends opening probate proceedings within 30-90 days from the date of death. The Maryland probate court via The Office of the Register of Wills in the county to decedent passed appoints a legal representative for the estate of the descendant called the “estate administrator.” This could be the spouse, executor, someone named in the will, or an attorney.
The first responsibility of the estate administrator is to provide the Maryland probate court and the IRS with an estimate of the estate’s “reasonable worth.” This is known as a “Date of Death Appraisal.” It usually involves an inventory and analysis of the possessions and property the decedent left behind, including:
- Real estate
- Investment accounts and security holdings
- Retirement accounts
- Insurance policies
- Valuable personal items
- Anything else of value
This inventory becomes the basis for many of the remaining legal procedures. It will be used to determine:
- How much the property is worth
- Whether the estate owes taxes
- Whether there are sufficient assets to pay creditors
- The amount available for distribution as an inheritance
The estate administrator will need to hire a Certified Real Estate Appraiser to obtain a “Date of Death Appraisal” (DOD) which assesses the fair market value of the decedent’s real estate as of the date of his or her death.
Most appraisals calculate the property’s value on the date of the appraisal in anticipation of a future sale. However, the property officially changes hands on the date of the owner’s death. It might take months to sort it out in probate, but legally that property belongs to the heirs the moment of passing.
The DOD assesses how much value the heirs actually got for tax purposes. To do that, an appraisal must be performed to determine what the property was worth on that date, even if it was months ago, using historical sales and market data from that date of death.
A DOD is used to identify if a federal estate tax return must be submitted to the IRS based on the value of the decedent’s real estate. It is also used to calculate the amount of estate tax due, if any.
It may also set a new income tax basis for the inheritors. For example, if the decedent leaves a grocery store to his or her heirs, the equipment, furniture, general merchandise, and inventory conveyed with the store must be valued separately.
These assessments are demanding. They need to be approached with care, using best practices defensible in court. Consult an attorney with expertise in tax and probate law for an opinion on the legal and tax implications of the DOD.
2. TIPS FOR HIRING THE APPRAISER
The most defensible and accurate valuation of the property in question will be obtained from a formal appraisal conducted by a Certified Real Estate Appraiser.
There are many ways to locate a Certified Real Estate Appraiser in Maryland. Ask a local real estate agent, bank, or loan broker to recommend someone. Be prepared to pay a few hundred dollars for a residential appraisal, more for an appraisal of commercial property.
Be wary of hiring an inexperienced appraiser. The IRS has clearly defined the standards the appraisal must meet, in conjunction with verifiable minimum requirements for education, designation, and experience for the appraiser conducting appraisals for property tax purposes. Remember, only the county appraiser can assess your property’s taxable value.
Your appraiser must have experience with the guidelines published by the IRS for date of death valuation. Ask your potential appraiser the following questions to gauge his or her suitability for the job:
- How much experience do you have as an appraiser?
- How many appraisals have you performed in my area over the past year?
- How conversant are you with Date of Death Appraisals?
- What are your fees?
- When can you deliver the appraisal?
- Will you deliver the appraisal report by mail or email?
3. THINGS TO CONSIDER
Tax-filing deadlines don’t always cooperate with a loved one’s date of passing. Try to order your DOD within six months of the tax filing deadline. If the timeline is shorter, get the ball rolling on an extension.
Alternative Valuation Date (AVD)
The IRS offers allowances for a homeowner to obtain an “alternative valuation date” (AVD) up to six months after the date of death. If the real estate market has declined within those six months, you can use the assessed price to demonstrate that the property has depreciated due to market conditions.
Exercising this option requires two appraisals—a DOD and an AVD. This could be an enormous tax advantage if the economy has been hit hard. The tax savings could dramatically offset the expense of a second real estate appraisal.
Recruiting the Assistance of a CPA or Attorney
A DOD carries some heavy implications. Consult with a CPA and/or an attorney to discuss the different strategies or tax implications of your DOD or AVD.
4. INFORMATION THE APPRAISER NEEDS
The appraiser performing your DOD or AVD will need to know the following:
1. The owner’s date of death. This tells him or her what date to target for comparable sales and market conditions.
2. The name of your CPA and/or attorney.
3. Any modifications to the estate since the date of death. The appraiser needs to assess the condition of the property on the date of death and cannot take into account any alterations or variations in the market that followed the date of death.
4. The deadline or due date for DOD.
5. Suitable times to conduct the appraisal. The appraiser will need to inspect both the interior and exterior of the property.
6. Certain records, such as deeds, inspection reports, or photographs, that can be used to authenticate the condition of the property at the time of death. Some of these reports are a matter of public record, meaning the appraiser can obtain them himself.
The appraiser will use this data, along with historical market statistics like construction data, the cost to build, and sales records in the MLS, to calculate the property’s market value as of the date of death.
5. NUANCES OF A HISTORICAL APPRAISAL
A DOD is a “historical appraisal,” also known as a “retrospective appraisal.” This means that the appraisal assesses the value for the property based on a date in the past, not the date on which the appraisal is performed.
Generally, only one appraisal is required, but depending on state law and the needs of the estate, an “as is” current market value, or its value based on the title transfer date may be required. In this case, two separate appraisals must be prepared to assess two separate values.
In some circumstances, an alternative date may be used for a DOD valuation of assets. The rules governing the selection of this alternate date are complicated. Real estate markets are volatile and change quickly. Retroactively determining a property’s value can be difficult.
Obtaining a Date of Death Appraisal is one of several demanding tasks that face bereaved family members upon the loss of a loved one. Contact New Era Appraisals at 410-934-0046 or email@example.com to discover more tips on how to prepare yourselves with the responsibilities that accompany this time of grief.