Insurance for Estate

This article was published in the May/June  1999 issue of AntiquePrime Magazine & Journal.

For What It's Worth ...

Q. Before my mother recently passed away, she had an insurance appraisal done. Can we use that appraisal for probate and estate taxes?

A. No, an appraisal for insurance differs from a probate and estate tax appraisal in several ways. Each uses a distinct "approach", requires the finding of different types of values, has different effective dates, and different markets to be researched for comparables. And a well-written appraisal will contain a clause limiting the use of the appraisal only to the function described in the appraisal report.

The effective date for an insurance appraisal is usually the date that the appraiser inspects the items to be insured. For probate and estate tax appraisals, the effective date is the date of death or six months after. Your mother's insurance appraisal predates her death.

The appraiser uses the cost approach for insurance appraisals and the market data approach for probate and estate tax appraisals. The cost approach involves comparison of the property with similar items which are for sale within the markets that the appraiser considered most common for each item, while the market data approach involves comparing the property to similar items which have sold within the markets that the appraiser considered most common for each item.

Most insurance policies (at least in Texas) are written for replacement cost coverage. The values estimated in insurance appraisals are Replacement Cost, either Replacement Cost New for depreciating items, or Replacement Cost Comparable for appreciable items such as antiques. Fair Market Value is the value sought for probate and estate tax appraisals. Replacement Cost is never used except for appraisals for the function of insurance.

To find comparables for depreciable items, the markets searched for insurance appraisals are primary retail shops. For appreciable items, the markets are orderly liquidation, such as estate sale and auction and/or secondary retail, such as consignment and antique shops. The best marketplace to search for comparables for probate and estate tax appraisals is the orderly liquidation market.

To keep a client from using an appraisal for any purpose other than that for which the appraiser was originally hired, the appraisal will contain a clause similar to the following: "This appraisal is to be used only for obtaining insurance coverage and any other use renders it null and void." Carefully read your mother's appraisal and look for the effective date, the approach used, the definition of value, the market researched, and a clause limiting the use of the appraisal. Then call the appraiser back and request an appraisal for probate and estate tax.