In today’s volatile markets, six months can make a significant difference in the value of the assets in a decedent’s estate and, in turn, the federal estate taxes due. Fortunately, the IRS provides an option for the timing of asset valuations for tax purposes that could reduce or even eliminate federal estate tax liability.

Alternate Valuation Date

Liability for the federal estate tax is typically based on the value the estate’s assets on the date of death. However, Internal Revenue Code Section 2032 permits an estate to elect to use an “alternate valuation” date of six months after the date of death in some circumstances.

Specifically, an executor can make the election if it would reduce both:

• The value of the gross estate, and
• The amount of federal estate tax due.

The executor will need to provide the IRS with the values on both the date of death and the alternate value date.

When It Matters

Of course, the election is relevant only for large estates, due to the estate tax exemption. For 2023, the first $12.92 million of an estate is exempt from federal estate taxation. If tax is due, it’s assessed only on the amount that exceeds this threshold — but the tax rate can run as high as 40% (for taxable amounts of more than $1 million). If an alternate valuation date can bring an estate’s value under the threshold, though, an estate could avoid the federal estate tax altogether. Even if the estate’s value remains above the exemption amount, the tax bill could have much less sting than if the date of death value was used.

Important: Estate assets distributed, sold, exchanged or otherwise disposed of within six months of the date of death are valued as of the date of disposal, regardless of the election. Assets with values that don’t fluctuate based on markets (for example, bank accounts or life insurance) are still valued as of date of death. Any interest or estate that’s affected by the mere lapse of time (for example, a patent, leasehold or remainder interest) is valued as of the date of death and adjusted for any difference in its value as of the later date that isn’t due to the mere lapse of time.

The election generally must be made on the estate tax return and is irrevocable. It’s essential that executors of large estates are made aware of the election before they file the return.

Important Caveats

The election isn’t without its potential drawbacks. For starters, it applies to all of an estate’s assets. For instance, an executor can’t elect the

• Alternate date for certain stocks but not others or
• For stocks but not real estate.

Moreover, the election could have implications for capital gains taxes. That’s because the lower value on the alternate valuation date becomes the tax basis for assets in the estate. Lower tax basis generally translates to higher gains and higher capital gains tax liability (based on tax rates of 15% or 20%) when assets are subsequently sold.

Also remember that the alternate value date is available only for federal estate taxes. An estate could still be liable for state inheritances taxes based on asset values calculated as of the date of death.

Tread Carefully

If an estate is at or near the estate tax exemption amount, the executor should strongly consider obtaining asset valuations for the alternate valuation date, in addition to the date of death. Bear in mind, though, that a lower valuation on the alternate date doesn’t necessarily mean the election is wise. Other factors could affect the ultimate outcome. Consult us before filing an estate tax return. We can help you choose the optimal valuation date for your situation.