Alternate Valuation Date & Estate Tax Liability: The Difference 6 Months Can Make
Originally published on November 23, 2022
If you have money invested in the stock market, you’re well aware of potential volatility. This volatility can affect your net worth and impact not only your lifestyle, but also potentially your estate tax liability. Specifically, if the value of stocks or other assets drops precipitously soon after your death, estate tax could be owed on value that has disappeared. One strategy to ease liability in this situation is for the estate’s executor to use an alternate valuation date.
Alternative valuation date eligibility
Typically, assets owned by the deceased are included in their taxable estate based on their value on the date of death. For instance, if an individual owned stocks worth $1 million on the day they died, the stocks would be included in the estate at a value of $1 million.
Today’s favorable rules allow a federal gift and estate tax exemption of $12.06 million. However, a small percentage of families still must contend with the federal estate tax. And with fluctuating market conditions, beneficiaries could be on the hook for an unreasonably large tax bill.
Consider the example estate above and its $1 million of stock. The beneficiary receiving the stocks has a tax basis calculated based on that $1 million. But by the time the estate’s assets are actually distributed, the markets have tumbled and the stocks are worth $400,000. The beneficiary gets stock valued at $400,000 with a tax basis of $1 million. If the stock is immediately sold the $600,000 capital loss in excess of $3,000 net capital loss on the return is carried forward to future tax years.
To avoid this situation, the estate’s executor may elect an alternate valuation date of six months after the date of death. Doing so could effectively lower a federal estate tax bill by avoiding use of the (higher) date-of-death valuation.
The election is permissible only if the total value of the gross estate is lower on the alternate valuation date than it was on the date of death. Of course, the election generally wouldn’t be made otherwise. If assets are sold after death, the date of the disposition controls. The value doesn’t automatically revert to the date of death.
Furthermore, the ensuing estate tax must be lower by using the alternate valuation date than it would have been using the date-of-death valuation. This would also seem to be obvious. However, that’s not necessarily true for estates passing under the unlimited marital deduction (or for other times when the estate tax equals zero on the date of death).
Note that the election to use the alternate valuation date generally must be made with the estate tax return. There is, however, a provision that allows for a late-filed election.
All assets fall under alternate valuation date
The alternate valuation date election can save estate tax, but there’s one potential drawback: The election must be made for the entire estate. In other words, the executor can’t cherry-pick stocks to be valued six months after the date of death and retain the original valuation date for other stocks or assets. It’s all or nothing.
This could be a key consideration if an estate has, for example, sizable real estate holdings in addition to securities. If the real estate has been appreciating in value, making the election may not be the best approach. The executor must conduct a thorough inventory and accounting of the value of all assets.
Estate plan flexibility
If your estate includes assets that can fluctuate in value, such as stocks, be sure your executor knows about the option of choosing an alternate valuation date. This option allows flexibility to reduce the chances of estate tax liability. Contact your estate planning tax advisor for additional information.
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