Appraiser Responds to Inforce Life Insurance Appraisal Recommendations

Appraiser Responds to Inforce Life Insurance Appraisal Recommendations

News story posted in Compliance on 6 October 2010| comments
audience: National Publication | last updated: 18 May 2011


Appraiser Alan Breus, CLU, ChFC has responded in opposition to an insurer's recommendation to Treasury that it adopt a policy of accepting a "fair market value statement" from the issuing life insurance company as a qualified appraisal when valuing inforce life insurance policies.

Full Text:

October 1, 2010

Ms. Catherine Hughes
United States Department of Treasury
Office of Tax Legislative Counsel
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220

Mr. Mark Smith
United States Department of Treasury
Office of Tax Legislative Counsel
1500 Pennsylvania Avenue, NW
Washington, DC 20220

Dear Ms. Hughes and Mr. Smith:

Re: A Response to the Proposal for Qualified Appraisal of Donated Inforce Life Insurance Policies from Susan E. Schechter, Vice President and Associate General Counsel and Ann B. Cammack, Vice President and Senior Counsel, MassMutual Financial Group

I am writing out of concern that the above proposed change in policy would be detrimental to both donors and the serviced charity. A flawed appraisal, resulting in the denial of a deduction1, will cause, among other problems, a chilling in the donor/donee relationship. The questions of appraiser qualification and responsibility remain an area of concern for the IRS due to a long history of appraisal challenges dealing with gifted life insurance. The simple reliance on a statement of valuation, "a Form 712" or an insurance company generated "fair market value statement" suggests, through the limit of its scope and its operational model for standardization, that there will be a continuation of questionable valuations.

As noted in the Proposal, "the appraisal is not meaningful when the asset donated is a life insurance policy for two reasons. First, because the IRS itself has established allowable methods for valuing life insurance policies", and those methods can be followed without a "qualified appraisal." Second, and more importantly, the deduction allowed for donation of life insurance is typically limited to the policy's cost basis, not its fair market value, because its gain is taxed as ordinary income. The operative term is "typically". This is far from an adequate response to the problem. A qualified appraiser is the person who can and will differentiate the typical valuation from the atypical. Without a formal appraisal a life insurance policy is prone to faulty valuations due to a lack of any reference to specifics in ownership period cost basis (i.e., due to purchase, repurchase or transfer from a corporation, trust, etc.), beneficiary issues, whether revocable or irrevocable or the use of policy cash value or settlement value from the secondary market (which in 2009 had a volume in excess of 12 Billion dollars).2 The importance of this secondary marketplace has been substantiated in that many states now require separate licensure with testing and also require that insurers notify insureds that secondary settlement is an option to surrender or lapse.3

In support of the qualified appraiser’s credentials – Under IRC § 170(f)(11), professional appraisers are required to have earned an appraisal designation from a recognized professional appraiser organization or otherwise met minimum requirements for education and experience specified by the Secretary. Under transitional terms of Notice 2006-96, minimum requirements may be met by having successfully completed college or professional-level coursework relevant to the property being valued, plus two years experience in the trade or business of buying, selling or valuing that type of property. Appraisers must describe this education and experience in the appraisal. Further, Treasury Regulation § 1.170A-13(c) (5)(i) defines a qualified appraiser as one who: holds himself or herself out to the public as an appraiser and performs appraisals regularly, is qualified to make appraisals of the type of property being valued as determined by the appraiser’s background, experience, education and membership, if any, in a professional appraisal association, is independent, and understands that an intentionally false overstatement of the value of the appraised property may subject the appraiser to civil penalties. As a paradigm for performance, IRS Notice 2006-96 establishes that an appraisal will be treated as having been conducted in accordance with generally accepted appraisal standards within the meaning of § 170(f)(11)(E)(i)(II) if, for example, it is consistent with the substance and principles of the Uniform Standards of Professional Appraisal Practice, as developed by the Appraisal Standards Board of the Appraisal Foundation.

Addressing the questions raised concerning "an administrative burden, and the cost of hiring a qualified appraiser which may discourage donations of a valuable asset". Any administrative burden, such as finding a qualified appraiser is diminimus (as attested to when Googling, "qualified appraiser, insurance"). And it should be noted that the appraisal fee is normally within the range of $400 to $500 per policy.

This is not a clerical job. I strongly suggest that maintaining the requirement for a fully qualified appraisal and appraiser leaves in place the essential insurance of having a professional who risks serious penalties, including losing the ability to practice before the IRS for three years, while paying a penalty that can be as much as 10% of the tax underpayment or 125% of the fee received for the appraisal, whichever is less. Added to this is the possibility that a disillusioned taxpayer could sue the appraiser to pay any additional tax, penalties and interest assessed on a deficiency; and, there is no longer a reasonable cause exception to a valuation. This leads me to believe that such penalties will be ample incentive to provide a complete and accurate appraisal.

Thank you for your consideration. Please contact me with your thoughts.


Alan Breus, CLU, ChFC
Member, Appraiser’s Association of America


1 Newton J. Friedman et ux. v. Commissioner; T.C. Memo. 2010-45; No. 19018-07; IRC Secs.  IRC Secs. 170, 6662(a)

2 Jack Kelly, ILMA Director of Government Affairs, Comments before: Committee of Financial Services, House of  Representatives, September 12, 2009

3 Due to policy acceptance and matter of volume, the Senior Settlement list of states that require state licensure includes: California, Delaware, Indiana, Iowa, Kansas, Maryland, New York, North Carolina, Tennessee, Utah, Illinois, Washington

Add comment

Login or register to post comments


Group details



This group offers an RSS feed.
7520 Rates:  July 3.4%  June 3.4%  May 3.2%

Already a member?

Learn, Share, Gain Insight, Connect, Advance

Join Today For Free!

Join the PGDC community and…

  • Learn through thousands of pages of content, newsletters and forums
  • Share by commenting on and rating content, answering questions in the forums, and writing
  • Gain insight into other disciplines in the field
  • Connect – Interact – Grow
  • Opt-in to Include your profile in our searchable national directory. By default, your identity is protected

…Market yourself to a growing industry