Estate executors are bound by the wishes of the decedent in many ways. However, they do have decision-making power over the valuation date, which is often a critical factor in determining the amount of taxes due. This choice has implications for both estate tax obligations and heirs’ future tax liabilities.

Now or Later?

Estate assets generally are valued for federal estate tax purposes on the date of the decedent’s death. But executors can elect to apply an alternate valuation date of six months after the date of death, under Internal Revenue Code Section 2032.

To qualify, the election must reduce both the value of the gross estate and the total net estate taxes due. These conditions may seem like a given, but the net estate tax might not be reduced if the unlimited marital deduction applies or if no estate tax is owed on the date of death for some other reason.

Sec. 2032 also excludes assets distributed, sold, exchanged or otherwise disposed of within six months after the decedent’s death. These items must be valued as of date of disposition, even if the executor elects the alternate date.

Additionally, the alternate date doesn’t apply to changes in asset values that are attributable solely to the lapse of time. This may be the case for patents, life estates, remainder interests and interests for limited terms. Such interests are valued as of date of death with adjustments for any differences in value as of the later date that aren’t due solely to the lapse of time.

Deciding What’s Appropriate for Your Situation

In general, the alternate valuation date is relevant only if the estate exceeds the lifetime gift and estate tax exemption. For 2024, the exemption is $13.61 million ($27.22 million for married couples). For 2025, it will increase to $13.99 million ($27.98 million for married couples). When the alternate valuation date trims an estate to under the exemption threshold, it can cut or avoid the costly federal estate tax, which is as high as 40% of the taxable estate.

The alternate valuation date is especially appealing when an estate includes stocks, and the market has been volatile. If the executor thinks the stock prices will fall over the six-month period, a later date may make sense from a federal estate tax perspective.

But the executor also should consider the long-term impact on the heirs’ tax obligations. When heirs inherit assets that have appreciated since the acquisition date, they receive a “step up” in the cost basis — their basis is either the value on the date of death or the value six months later. Electing the alternate date reduces an asset’s stepped-up tax basis, which could increase the heir’s gain if the asset is later sold at a higher price, leading to higher capital gains tax obligations. However, the maximum federal tax rate on long-term capital gains is currently only 20% (23.8% if the net investment income tax applies), compared to 40% for the federal estate tax. Heirs in lower tax brackets may be subject to lower tax rates on long-term capital gains.

It’s worth noting, too, that the executor can’t pick and choose the assets for which the alternate valuation date applies; it applies to all the assets. If the estate includes substantial real estate holdings that have been steadily appreciating, it may be wiser to use the date of death as the valuation date.

Important: In states that have estate or inheritance taxes, executors should review state-specific regulations to determine if the alternate valuation date is accepted. Some states may not follow the federal rules. This can complicate matters, especially if the estate includes assets that requires qualified appraisals from independent valuation professionals.

Balancing Act

Executors should consider multiple factors when determining the appropriate valuation date to optimize tax outcomes when transferring estate assets to heirs. Our Private Client Services team can help you cover the bases.