Wednesday April 24, 2024
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4.4.4 Form 8283 and Form 712
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Form 8283 and Appraisal Rules
If a person or an estate makes a noncash charitable contribution greater than $500, IRS Form 8283 must be included with his, her or its tax return. If the property is not publicly traded stock that may be valued on an exchange and exceeds $5,000 in value ($10,000 for closely held stock), a qualified appraisal is required. The appraisal must be made no earlier than 60 days prior to the gift and not later than the date the return is due (with extensions).
As a result, Form 8283 must be completed for a gift of a life insurance policy (a noncash gift) with a fair market value in excess of $500. A separate appraisal and separate Form 8283 is required for each policy contributed. For a policy with a fair market value of $5,000 or more, an independent qualified appraiser must determine the policy's value.
The natural choice for an appraiser of a policy is the issuing insurance company, because the insurance company is in the best and easiest position to value the policy. However, the appraisal rules require an independent appraiser. Since the insurance company is directly related to the donor and policy, it is uncertain whether or not the insurance company is independent for appraisal purposes. Therefore, the IRS may argue that the insurance company is not independent with respect to the appraisal rules.
Most charitable deductions of insurance are limited to cost basis. If the insurance company states that the cash value exceeds the cost basis, some donors and their advisors may choose to use the cost basis for the charitable deduction. This position is based on the theory that the cash value represents a portion of the underlying insurance company portfolio in public securities, and the valuation by the insurance company is similar to the valuation of mutual funds by financial services companies. However, most donors and their advisors will decide to take a more conservative position and obtain an independent appraisal.
If an independent appraisal is desired, a qualified appraisal service should be retained. Appraisers of assets other than real estate must meet several requirements. The appraiser will be qualified if he or she has an appraisal designation from a recognized organization or has otherwise met comparable education experience requirements, regularly performs and is paid for appraisals, has verifiable education and experience with the type of property appraised, has not been prohibited from practicing before the IRS and has not been excluded by Treasury regulations from serving as an appraiser. Sec. 170(f)(11)(E)(ii) and (iii).
For insurance gifts on returns filed after February 16, 2007, the appraiser must fulfill three requirements. He or she must have completed applicable "college or professional-level coursework," must have two years of experience in buying, selling or valuing insurance and must thoroughly describe in the appraisal his or her education and qualifying experience.
Generally, appraisals will qualify if consistent with the Uniform Standards of Professional Appraisal Practice set forth by the Appraisal Standards Board of the Appraisal Foundation. Notice 2006-96, Section 3.03.
Appraisals on returns filed after Feb. 16, 2007 must also include a statement that the appraiser recognizes that a substantial or gross valuation misstatement that he or she knew or reasonably should have known would be used on a tax document could lead to a civil penalty. Sec. 6695A(b). The appraiser penalties for incorrect appraisals are the greater of $1,000 or 10% of the understatement from a substantial or gross valuation misstatement, with a cap of 125% of the appraiser's gross income from the appraisal. Sec. 6695A(b). The IRS may also discipline appraisers after notice and a hearing. Disciplinary action may include suspending or barring an appraiser from preparing or presenting appraisals to the IRS.
Potential independent advisors who offer services for insurance appraisals are available at www.charitablesolutionsllc.com and www.thebreusgroup.com.
Form 712 Life Insurance Statement
In addition to IRS Form 8283, IRS Form 712 Life Insurance Statement may be needed. Form 712 declares the fair market value of a policy 1) at the insured's death for estate tax purposes or 2) for lifetime gifts, including charitable contributions.
Generally, the insurance company at the request of the donor prepares Form 712. This form is extremely useful for obtaining information needed to calculate a donor's charitable deduction. For charitable income tax purposes, the date of Form 712 should correspond to the date of the contribution of the policy.
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