What Does Alternate Valuation Date Mean?
An Alternative Valuation Date Can Reduce Estate Taxes
The fair market value of all assets owned by a deceased person at the time of his death contributes to his gross estate for tax purposes. Cumulative values over $5.45 million are subject to a 40 percent estate tax rate as of 2016. This can result in a hefty tax bill for significantly large estates, so the Internal Revenue Code offers an option.
Values as of the date of death can be used, or the personal representative of the estate can elect to use an alternative valuation date instead, six months after the date of death. The estate must be large enough that it will owe estate taxes, and using the alternate valuation date must reduce that tax liability for the estate to qualify.
Using the Alternate Valuation Date When Property is Sold
What happens if some of the deceased person's property is sold, distributed or otherwise disposed of prior to the alternative valuation date? Under these circumstances, the value of the property must be determined as of the date of sale, distribution or other disposition. The value does not automatically revert back to the date of death.
Advantages of Using the Alternate Valuation Date
Why would the personal representative choose to use the alternative valuation date values instead of the date of death values?
The advantage is that if one or more estate assets have lost a significant amount of value during the six months after death, this will reduce the amount of the estate tax that is due.
Estates with values close to the $5.45 million exemption amount can particularly benefit. If the date of death valuation reflects an overall gross estate worth $5.46 million, using the alternate valuation date might potentially bring that value down under the threshold if certain assets have lost value.
This can mean savings of $4,000, money that might otherwise go to the beneficiaries -- 40 percent of the $10,000 difference between $5.45 million and $5.46 million. An estate valued at $5.45 million or less would not be liable for estate taxes at all.
Disadvantages of Using the Alternate Valuation Date
If the alternate valuation date values are used, all assets must be revalued, not just those that have gone down in value. This might affect the overall reduction in the value of the estate and result in fewer tax savings. Each saving of $10,000 in value might be offset by $10,000 gain in value of another item of property.
Using the alternative valuation date can also affect the step-up in basis enjoyed by beneficiaries who later sell inherited assets. The stepped-up tax basis in an inherited asset is the asset's value as of the date of valuation for estate tax purposes. Capital gains taxes come due on the difference between this value and the eventual sales price. When the alternate valuation date decreases the tax basis, the beneficiary may be liable for increased capital gains -- he'll realize more of a profit.
When and How to Make the Alternate Valuation Date Election
The personal representative must elect to use of the alternate valuation date within one year of the due date of the federal estate tax return, IRS Form 706, including extensions.
There is no way to request an extension for making the election. The election is irrevocable after it is made.
The personal representative makes the election by indicating so on IRS Form 706 at line 1, page 2, part 3.