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The importance of correct art valuation

New York residents who are preparing their estate plans should not neglect to value their artworks correctly. By and large, art does not produce any revenue until it is sold, and it can be difficult to place an accurate value on paintings and other works because the among will usually change in keeping with prevailing market conditions. However, failing to do so can result in a dispute with the Internal Revenue Service.

One example occurred when an art collector owned three particularly valuable pieces by Pablo Picasso, Robert Motherwell and Jean Dubuffet. The owner died in 2009, and the Picasso sold at an auction for $12.9 million a year later, a price that was more than twice what had been set by the auction house. However, the estate valued the painting at $5 million on its 2009 estate tax return. The IRS thought that the Picasso and the other two paintings were all worth more than the value the estate had assigned them. It sent experts to assess the paintings' value, and they valued all three of them at a higher price, with the Picasso being valued at $10 million. A formal Notice of Deficiency was issued to the estate by the IRS, and the case reached the U.S. Tax Court.

The court agreed that the state of the art market was worse in 2009 than in 2010, but it still sided with the higher assessment by the IRS for the Picasso, although it was lower than the painting sold for in 2010. However, the court sided with the estate with respect to the value of the other two paintings.

The value of certain types of assets that are contained in an estate often change after the estate plan is made. This can occur with art, but it can also occur with other investments as well. It is important that both the owner and the executor or administrator have a good sense of the current value of the assets for tax and estate administration purposes.

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