When any asset is transferred by gift or through the settlement of an estate, whether the gift is to charity or to an individual, whether it is made directly or through a Trust, you must report the Fair Market Value (FMV) of the asset; and, possibly, either pay taxes or, in the case of a gift to charity, receive an income tax deduction. Determining the FMV of publicly traded stocks and bonds is relatively straightforward as stocks and bonds are fungible, and the market prices of similar investments sold on the same day as the transfer are readily available. Determining the FMV of illiquid assets, such as privately held companies, real estate and tangible property is more difficult. This is especially true when determining the FMV of artwork and other collectibles, where the asset is often not only illiquid but may also be unique, making it hard to find comparable sales in contract to publicly traded investments.
To determine the FMV of any illiquid assets, you will need an appraisal which complies with the Uniform Standards of Professional Appraisal Practice (USPAP). For artwork and collectibles specifically, the appraisal also needs to meet the standards of the Art Advisory Panel of the Internal Revenue Service. Often times, especially in an estate, this appraisal process is done in haste since there is a requirement to file an estate tax return within nine to twelve months of the date of death. To avoid the mistakes that come from hasty actions, we encourage all owners of art and collectibles to begin an inventory during their lifetime that complies with USPAP and the Art Advisory Panel standards at a minimum. Here are our recommendations.
Describing an Item :
When describing an item, whether tangible (such as a coin) or intangible (such as copyrights) it is necessary that descriptive terms and references be consistent. For example if one item is described as created by Michelangelo di Lodovico Buonarroti Simoni and another as created by Michelangelo, there can be confusion whether they both refer to the same artist. One source for descriptions is the Getty’s Categories for the Description of Works of Art (CDWA) is a schema to describe core records of works of art and collectibles which includes the categories by which an object, architecture or group can be consistently described. An example of such a catalog description for Vincent Van Gogh’s “Irises” can be seen at
When describing an item, remember that there are two types of data involved: visual and the textual. Additionally, references such as location, ownership, medium, concept and subject matter should be included in each record. Ideally, if the description refers to an authoritative record that may not be readily available online, such as an auction catalog, a digital image of the relevant reference is added or an existing record to be modified, to the appraisal.
Checklist of USPAP and Art Advisory Panel Standards for Appraisal
When you are reviewing the inventory in preparation for an appraisal, it is useful to keep in mind the standards for both the USPAP and the Art Advisory Panel. Here is a checklist.
- Identification of the owner or owners,
- Identification of the intended use of the description.
- Identification of the type and definition of value and the most probable prices in terms of:
- Financial arrangements equivalent to cash (i.e. collateral for loans), and
- Other precisely defined terms and any non-market financial conditions or incentives, with the terms of such being clearly identified.
A COMPLETE DESCRIPTION OF THE ITEM OF ART, INCLUDING:
- The name of the artist or culture,
- The title or subject matter,
- The medium, such as oil or canvas, or watercolor on paper,
- The date created,
- The size,
- Any marks, signatures, or labels on the item of art, on the back of the item of art, or affixed to the frame,
- The history (provenance) of the item, including proof of authenticity, if that information is available,
- A record of any exhibitions at which the item was displayed,
- Any reference source citing the item, and
- The physical condition of the item,
- A professional quality photograph of a size and quality fully showing the item, preferably an 8×10-inch color photograph or a color transparency, not smaller than 4 × 5 inches,
- The quality of the item within its type,
- Other physical and economic attributes that have a material effect on the value,
- The ownership interest valued, if more than one owner exists
- Known restrictions on the item, and
- Any other item, such a frame, associated with the item.
- The scope of work necessary to produce a credible appraisal.
- Analysis of comparable sales, for a credible comparable sales valuation-based-sales comparison when necessary.
- Analysis of costs for a credible cost valuation, when necessary, including:
- The effect on the value of any encumbrance, such as pledges as collateral.
- The value of an item reflects the fact that the item is part of a collection of items, including:
- Comparable sales of an assemblage of similar items as inventory or as a collection
- Opinion on effect of sale of all of the items in a collection at the same time
- The estimated time required to sell individual items of an assemblage at fair market value
- The market effect of repair, restoration or other modifications to the item.
This may seem overwhelming at first, but if you start with the basic descriptions and add information over time, having an inventory up to the necessary standards is achievable. We have used online collections management application to collect and process the information for our clients. By doing so we have reduced both the costs of the appraisal required for gift and estate tax returns and the number of possible errors, reducing the likelihood of an audit.