Wealth Law Blog : Oregon Asset Protection Lawyers & Attorneys : Samuels Yoelin Kantor Seymour & Spinrad Law Firm : OR Estate Planning, Fiduciary Litigation

Heirs and personal representatives of estates frequently ask: “Why can’t we use the free market analysis report from the local real estate agent to determine the fair market value of the real property in the estate?” 

A free market analysis by a local real estate agent is a valuable service, if you are thinking of listing the property for sale. However, we do not recommend it for estate valuation purposes.

Generally, the income tax basis for any real property owned by a decedent receives a tax basis adjustment equal to the fair market value of the property as of the date the decedent died. This valuation rule is slightly different for 2010 estates, although Congress is expected to make some changes in the next few months. Those rules will be discussed in a later blog article. 

The date of death fair market value information is important for several reasons. 

• First, this is the value that generally must be reported if an estate tax or inheritance tax return is required to be filed. 
• Second, this is the information that determines the adjusted income tax basis for the real property of the decedent. 
• Third, if the estate has multiple beneficiaries, the value of the real property may play a role in determining how much distribution each beneficiary is to receive. 
• Last, if the asset is subject to probate, it is information that must be reported on the probate inventory. 

Even though a free market analysis may provide a market value very similar to an appraisal report, there are a number of reasons why the analysis will not be sufficient. 

• First, the market analysis is generally based on current market data and is not specifically focused on the fair market value as of the date of death. 
• Second, the agent providing the free market analysis is generally not licensed as an appraiser; and, therefore, is not in a position to defend the values provided in the market analysis in the event an auditor or a disgruntled heir questions the market analysis. 
• Third, because the free market value analysis is not a qualified appraisal, government auditors are likely to reject the report as not being qualified, and thus if the value is challenged in an audit, the personal representative will need to get an appraisal anyway.
• Last, disgruntled heirs could claim that the personal representative did not fulfill his or her fiduciary duty to the heirs of the estate by failing to obtain a qualified appraisal.

During the current economic downturn, the income tax savings will likely be reduced. As a result, disgruntled heirs could be further disgruntled. In this circumstance, a qualified appraisal is essential.

For these reasons, we generally recommend that the representative of the estate obtain appraisal reports from qualified appraisers for all estate real property. In the case of residential property, the cost is a few hundred dollars. In the case of commercial property, it is a few thousand dollars. Since most, but not all, properties have a higher value, the potential income tax savings is well worth the appraisal expense. 

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In Part 1 of my last article, Estate Planning and “Virtual Assets,” I discussed the complex issues relating to estate planning and “Virtual Assets,” which include financial accounts, email accounts, social media sites, and other personal or family information. All of these assets are typically accessed over the internet with a username and password. Here are two additional recommendations with respect to Virtual Assets:

1.   Consider Who Should Receive Your Virtual Assets. If a virtual asset is a bank or investment account, your will or trust should (presumably) control who will receive these assets at your death. However, what about access to family photos or genealogical information? One might want to specifically instruct your executor or trustee to replicate and distribute these items so that they pass to multiple intended beneficiaries.  

2. Use Caution in Using Commercial Services to Hold Your Virtual Assets. A new cottage industry has sprung up to provide a type of “online safe deposit box” to store your virtual assets and provide a means by which designated individuals can gain access to your virtual assets. A few words of caution are in order. First, be careful and make sure you’re dealing with a reputable company. Giving someone the keys to your digital existence would be a goldmine for someone bent on stealing your identity. Second, remember that giving someone access to information about an asset is not the same as giving that asset to that individual. Your will or trust should ultimately control who should inherit your assets, not an online service provider. There may be complex legal and tax issues that need to be taken into account in designating beneficiaries of virtual assets. For example, one online service provider refers to an “electronic will.” In most states, a will requires certain formalities (typically a written instrument signed before two witnesses), and the absence of these formalities can render one’s good intentions legally invalid.

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For many, our primary means of communication is email, often through multiple email accounts. We “tweet” about the latest happenings through our Twitter accounts. We keep in touch with friends and colleagues through social networking sites such as Facebook and Linkedin. We store family photos and other important information on a growing array of online sites. We access our financial assets, such as bank accounts and brokerage accounts, over the internet. We pay our bills electronically. We own internet domain names. In the aggregate, these “virtual assets” have tremendous aesthetic and financial value. 

Yet, when we die or become incapacitated, what happens to these assets? Who can gain access to this “virtual existence” when we’re gone?

The answer is a very complex. Most of these virtual assets are controlled by a license agreement with the provider of the online access. Such license agreements vary from provider to provider. Without careful planning, chaos may rein. Here are some key recommendations to consider:

1.      Integrate Virtual Assets into Your Estate Plan. Wills, trusts, and powers of attorney have been around for centuries. In appointing an executor, trustee, or agent under a power of attorney, you are appointing a representative that you trust to take control of your assets and follow your legal instructions. Whether dealing with virtual assets or an office building, you should appoint individuals in these roles that are both trustworthy and competent to carry out these instructions.

2.      Create a Virtual Asset Instruction Letter. A “Virtual Asset Instruction Letter” or “VAIL” will list all of your online accounts and assets, and will provide web addresses, user names, and passwords to give your designated representative the ability to identify and access these accounts. Place the VAIL in a safe location, such as a safe deposit box, that can only be accessed by your legal representative. In addition to a written list, you might consider saving the VAIL to a flash memory drive or CD which can make your representative’s access to these accounts more efficient. For assets such as email accounts, your VAIL may instruct your representative to delete the account after a period of time. Most such accounts will simply terminate after a certain period of inactivity.

Check back with WealthLawBlog.com in a few days to see additional recommendations relating to virtual assets.

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From time to time we will publish local opinons of interest:

Background:  

Plaintiff, director of a charitable organization (Wintercross) and the entities controlled by the organization (Jensen), engaged in self-dealing in the course of making investments on behalf of the organization.  Plaintiff failed to pay the mandatory charitable contributions, which resulted in tax penalties. During this time, however, Plaintiff maintained possession of items of personal property that could have been distributed to another qualifying entity, thus reducing or eliminating tax penalties. Plaintiff also structured the sale of an apartment complex that both she and Jensen had an ownership interest in such that she received cash and Jensen carried the balance of the deferred purchase price.  Then, when the purchaser was unable to pay, Jenson faced 100% of the loss.  Finally, acting against the advice of an accountant, Plaintiff invested the proceeds of that sale in a second apartment complex.  The value of the complex decreased substantially and resulted in a loss of millions in assets.  And, upon Jensen’s management and/or acquisition of each apartment complex, Plaintiff purchased a home that adjoined such complex.  Plaintiff then allowed maintenance personnel to occupy the home.  Although Plaintiff arranged for the complex to pay for both the mortgage and utilities associated with the home, title to the home remained with Plaintiff. Finally, Plaintiff used Jensen’s assets to pay for her attorney fees associated with this proceeding. 

Holding:

Plaintiff abused her authority as a director and officer of Wintercross and was removed, with millions awarded for damages. Although Plaintiff did not directly divert Wintercross assets to herself, she used her control to benefit personally when such benefits should have been allocated to Wintercross. Plaintiff did not act prudently when she: (1) refused to follow the advice of the accountant; (2) failed to make sensible investments, resulting in substantial loss; (3) failed ensure that the mandatory minimum charitable distributions were made; and (4) used the organization’s assets to fund a personal proceeding. The court determined that Plaintiff’s claim of ignorance was ill-founded and did not create a defense to her liability because she took on the responsibility of handling the affairs of Wintercross, and in doing so, engaged in self-dealing.

Ellis v. Department of Justice and Wintercross Foundation

Clatsop County Circuit Court Case No. 09-2215

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