CHICAGO Faced with the possibility of the lifetime gift tax exemption dropping precipitously next year and the estate tax rate rising, wealthy individuals are rushing to transfer their assets to family members.
It is no wonder that 73-year-old commercial real estate appraiser Jim Levy is busier now than he ever was - and that is saying a lot, considering he has been in the business for 50 years at Appraisers and Planners Inc of New York City, which his father started in 1933.
"It's crazy right now," says Levy. "And this is just the beginning."
Right now, federal law provides a lifetime gift tax exemption of $5.12 million for individuals, and double that amount for married couples pooling their resources.
What is more, estate taxes on anything above that cap top out at 35 percent, 15 percentage points lower than the ceiling just a decade ago. But unless Congress extends this Bush-era tax cut beyond 2012, the cap will return to its lowest level since 2002: $1 million per person, with a top tax rate of 55 percent.
If the tax cut is not extended and the U.S. Treasury can collect the full estate tax on every high net-worth investor in 2013, those taxpayers would lose $3.19 trillion, or about 22 percent of the U.S. gross domestic product, estimates Joel Redmond, vice president and senior financial planner at Key Private Bank.
This explains why those who appraise the value of commercial property and businesses are in such a crunch these days. For families to gift those valuable assets through a trust, for example, they have to know what they are worth to comply with Internal Revenue Service regulations.
"We're sort of in a perfect storm right now because the gift tax exemption is higher than it's ever been, and the value of businesses are at an all-time low, which makes it a perfect time to gift them," says Karen Goldberg, president of the Estate Planning Council of Manhattan and a principal at accounting firm EisnerAmper.
The surging demand for appraisals could surpass anything that even the most battle-hardened veterans are bracing for, says Jim Cody, director of estate and trust services at Harris myCFO in Palo Alto, California.
The families he works with typically have more than $100 million in wealth, and for them, summer often means extended vacation time. After Labor Day, they just might get around to that urgent email from their lawyer or accountant about the estate tax deadline.
"With the ultra-wealthy," Cody notes, "it's sometimes tough to get their attention."
But finding an appraiser is hardly a matter of asking an accountant or real estate buddy to fill in some convincing numbers.
"The IRS is very specific in terms of the appraiser and the requirements; it has to be someone who is qualified," Goldberg says. That often means someone accredited by the American Society of Appraisers after passing a 15-hour course and exam, and a separate test on trade ethics.
Here is what experts in the estate planning and appraisal fields say you need to know, along with their advice on what steps to take to get your gifting plans in order.
1. What is the first step?
Even before consulting an appraiser, experts agree that you need to meet with a lawyer (and often an accountant) experienced in estate planning.
2. How careful do you have to be?
Taking a wild guess or throwing random numbers together when assigning a value to real estate or a business interest will not cut it, since the IRS audits estate tax numbers aggressively, Cody says.
"They only hire attorneys for that job," he says, "and they are the most profitable per-hour attorneys in the IRS, because every hour they work generates significant revenue for the government."
3. What if you cannot get an appraiser?
No one wants to say that they will turn clients away, but insiders acknowledge the anticipated year-end avalanche of requests will bog down the normal turnaround time of four to eight weeks. In other words, anyone needing a precise appraisal after October 1 might not make it by year's end.
That said, there is one way to buy a little time, says Scott Nammacher, an accredited senior appraiser and managing director of Empire Valuation Consultants. Because gifting for estate tax purposes is reflected in filings to the IRS, he said, the actual document is not needed until the 2012 tax return is filed in 2013.
4. How much will it cost me?
Credible companies will charge between $10,000 and $12,000 and up to appraise a business, depending on its complexity, state of records and other factors, Nammacher says. Fees will be comparable for commercial real estate portfolios, but could be higher, depending on their size and complexity. In the case of gifting an individual piece of family property (a vacation home, for example), appraisal fees will run more toward $500.
But in terms of how one property might get appraised compared with another, "We do not differentiate between privately held real estate and commercial real estate," Levy says. "Market value is market value."
Levy, the commercial real estate appraiser, also cautions that clients can make mistakes by choosing the firm that submits the lowest fee.
"If they don't have a sufficiently large staff, they will have difficulty adhering to the time deadlines they promise," he says, adding that more established firms also have more experience in dealing with the IRS.
(This story has been filed to correct August 7 column and clarify in No. 4 that estimated price of an appraisal is between $10,000 to $12,000 and up.)
(Follow us @ReutersMoney or here. Editing by Beth Pinsker Gladstone and Lisa Von Ahn)