By Philip J. Kass | From the March/April 2020 issue of Strings Magazine
Bartolomeo Giuseppe Guarneri ‘del Gesù’ lived from 1698 to 1744. His instruments, however, have enjoyed a somewhat more extended lifespan and have thus all outlived more than several caretakers. And if in this one inevitability has been met (death), the other (taxes) has followed closely on its heels. Over the course of my career, I’ve spent a fair amount of time putting together musical-instrument appraisals for estate purposes. It is a complicated undertaking, but the good news is, unless you are the heir to a storied Cremonese, you probably won’t need one.
Who Needs an Appraisal?
Hardly anybody reading this article will ever need a musical-instrument appraisal for estate purposes. But if you happen to have a few loose Guarneris lying around, then the IRS is going to need one (the current IRS estate exemption is $11,400,000). That said, it should be pointed out that the IRS is only concerned with federal tax returns. Every state has its own set of rules, all of them different, and all of them with different conditions regarding estate taxes. So, if you think you might fall into the taxable category, you should get in touch with a family financial planner, tax accountant, or estate lawyer.
So, if you are the sort who owns a multimillion-dollar instrument, or a collection of such instruments, your heirs may need to file an appraisal for these with the IRS. For such an appraisal, focusing solely on instruments and bows, you will need a specialist versed in violin-family instruments who can create a persuasive report, which not only establishes a fair market value for the instruments but also justifies his or her conclusions. That individual will probably need to have membership in one of the leading appraisal organizations and will need to have completed a series of classes on the subject of specialized appraisals. More critically, he or she must understand acknowledged certification.
What? Patience, and read on.
What You Need
The documents required by the IRS for gifts, estates, and charitable donations are specialized appraisals. They look only vaguely like the ones you’re used to seeing. An estate appraisal I recently completed for a Guarneri ran 18 pages. It could have been longer had I chosen to include copies of documentation within the body of the text. The description of the instrument itself ran just two of those pages. The rest consisted of the additional caveats, explanations, and discussions of the items in question, and justification of the value assigned, definitions of terms, sources of data, and so forth. The point of the document is to leave nothing ambiguous or unclear. And there’s a very good reason for that.
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After a period of time during which the IRS became increasingly aware that frauds were being committed in such matters, they began to work with a group called the Appraisal Foundation, an independent body founded by the members of the various appraisal organizations, such as the Appraisers Association of America, the American Society of Appraisers, the International Society of Appraisers, and other similar organizations. Working with the IRS, they drafted a series of regulations that complied with IRS rulings so that appraisers could perform such work without running afoul of the authorities. These regulations are known as the Uniform Standards of Professional Appraisal Practice, or USPAP.
USPAP rules are standards, and they exist as much to protect the appraiser as they do to issue a clear opinion to the IRS. Appraisers who cut corners, violate the standards, or use a predetermined value to benefit their clients risk being censured by the IRS, barred from writing appraisals accepted by it, and can even stand financially liable for the difference between their value and the one the IRS accepts.
Establishing a Value
What is Fair Market Value? The IRS provides this definition: “The price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts.” This often reflects retail prices but can be equally balanced between both auction and retail sales data—the collection of which can be tricky.
Here arises the question of which market to rely on.
A top example of classical Cremonese work, in fine condition, almost invariably sells in the retail market, and thus sales data is sketchy at best. The compromised and troubled instrument or bow will most likely sell in the auction market. So, the appraiser will have to determine which market is most reasonable and logical for the items in question and draw data from it, all the while explaining what data is appropriate and what is not. Throughout the process, the appraiser must demonstrate an understanding of the current market and knowledge of the items being appraised.
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For each individual item in an estate appraisal, the IRS will require at least three similar examples, drawn from both auction and retail markets. The appraiser then must explain how the available sales relate to the item in question and why it should be higher or lower or the same as the sales-data instruments, which are generally known as Comparables. Finding appropriate Comparables ranges from the simple to the impossible. On one hand, auction houses nowadays publish their results online, sometimes including images and data about the instruments in question and sometimes in connection to downloadable PDF catalogs. Tarisio, on the Cozio pages, posts past sales data on instrument makers’ works that is regularly updated.
Private sales, on the other hand, are privileged information, and needless to say there aren’t a lot of dealers willing to divulge details without a degree of anonymity. Therefore, one of the caveats to such information is that it is accurate.
USPAP also provides a plan for an insurance appraisal, the key difference being that the insurance company does not need Comparables. However, I have incorporated a number of these features within my own insurance appraisals, including snapshot photos of the item being appraised (to reveal its condition at the time of appraisal), and a full description with measurements and provenance data, all of which an insurance company might find very useful in the event of a loss or theft.
One additional caveat included in all of these documents, however, is a statement regarding limited use. It is often the case that appraisals are reused as certificates, something the insurance world knows to be unintended use. The writer of a certificate, whose interest is in the authenticity rather than the value, wears a different hat, so to speak, than does the appraiser, for whom value is paramount, and this difference lends further credibility to the appraiser’s report. Besides, no appraiser likes having their appraisal, which presumes authenticity as described rather than making a firm attestation, presented as the sort of fact on which thousands of dollars can change hands in a commercial transaction.
As I said earlier, the chances of your needing an appraisal for estate purposes are probably fairly slim, depending on the advice of your financial advisor, and so you will probably never need to confront this issue, but it always helps to be better informed on the subject—after all, who knows where prices are going, or how the taxman will view them in the future? If this information can help you avoid a crisis one day, then it is definitely worth knowing.