Asset Valuations and Your Estate Plan Go Hand in Hand

If your estate plan calls for making noncash gifts in trust or outright to beneficiaries, you need to know the values of those gifts and disclose them to the IRS on a gift tax return. For substantial gifts of noncash assets other than marketable securities, it’s a good idea to have a qualified appraiser value the gifts at the time of the transfer.

Adequately disclosing a gift
A three-year statute of limitations applies during which the IRS can challenge the value you report on your gift tax return. The three-year term doesn’t begin until your gift is “adequately disclosed.” This means you need to not just file a gift tax return, but also:

  • Give a detailed description of the nature of the gift,
  • Explain the relationship of the parties to the transaction, and
  • Detail the basis for the valuation.

The IRS also may require certain financial statements or other financial data and records.

Generally, the most effective way to ensure you’ve disclosed gifts adequately and triggered the statute of limitations is to have a qualified, independent appraiser submit a valuation report that includes information about the property, the transaction and the appraisal process.

IRS-imposed penalties
Using a qualified appraiser is important because, if the IRS deems your valuation to be “insufficient,” it can revalue the property and assess additional taxes and interest. If the IRS finds that the property’s value was “substantially” or “grossly” misstated, it will also assess additional penalties.

A “substantial” misstatement occurs if you report a value that’s 65% or less of the actual value — the penalty is 20% of the amount by which your taxes are underpaid. A “gross” misstatement occurs if your reported value is 40% or less of the actual value — the penalty is 40% of the amount by which your taxes are underpaid.

Before taking any action, consult with us regarding the tax and legal consequences of any estate planning strategies. In addition, we can help you work with a qualified appraiser to ensure your gifts are adequately disclosed.

Will your favorite charity accept your donation?


If your estate plan includes non-cash charitable donations or liquid asset donations with restrictions, you may wish to discuss such planned gifts with the intended recipients before you finalize your plan. This is particularly important for donations that place restrictions on the charity’s use of the gift, as well as donations of real estate or other liquid assets. In contrast, if you are making a simple cash bequest, not contacting the charity might be the better approach. If you are not interested in immediate recognition, not contacting the charity about a gift will keep the charity off your front doorstep until such time as is appropriate to let them know.

Why a charity may reject your gift
Some charities have policies of rejecting gifts that come with strings attached — they accept only unrestricted gifts. And many charities are reluctant to accept gifts of real estate or other non-cash assets that may expose them to liability or require an investment in order to convert the assets into operating funds.

If a charity rejects your gift, the property will end up back in your estate and will go to any contingent or residual beneficiaries. If these beneficiaries are not other charities, rejection of the gift may create estate tax liability.

Reconsider donating real estate
Real estate is particularly risky for nonprofits. The charity may be exposed to liability for environmental issues, zoning and building code violations, and other risks. It may require a cash investment to pay the mortgage or maintain the property. And certain types of property — such as rental properties — can generate “debt-financed income,” which may cause the nonprofit to be subject to unrelated business income tax.
Even if a charity accepts gifts of real estate, it may place strict conditions on such gifts. For example, to minimize their liability, some charities require donors to place real estate in a limited liability company (LLC) and donate LLC interests. Another option is to donate property to a supporting organization that disposes of real estate on a charity’s behalf.

Call us first
If you would like to make charitable gifts through your estate plan, contact us and we can guide you on the advisability of contacting the charity and coordinating with them to ensure that your donation would be accepted. We can then help you make the proper revisions to your estate plan.