Using an alternate valuation date for estate assets allows the executor to potentially reduce estate taxes. Values as of the date of death can be used, or the executor can instead elect to value the property at six months after the date of death.
The fair market value of all assets owned by a deceased person at the time of their death contributes to their gross estate for estate tax purposes. Cumulative values over $11.7 million are subject to a 40 percent estate tax rate for 2021. This can result in a hefty tax bill for significantly large estates, so the Internal Revenue Code offers an alternate valuation date option.
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.
An estate valued at $11.7 million or less would not be liable for the estate tax at all.
Advantages of Using the Alternate Valuation Date
Using the alternate valuation date can reduce the amount of estate tax that's due if one or more assets should lose a significant amount of value during the six months after death.
Estates with values close to the exemption amount can particularly benefit. Using the alternate valuation date might potentially bring that value under the exemption threshold if certain assets have lost value. In that event, the estate would no longer owe the 40% tax.
Disadvantages of Using the Alternate Valuation Date
This is an across-the-board election. All assets must be revalued if alternate valuation date values are used, not just those that might have gone down in value. This can ultimately affect the overall reduction in the value of the estate and result in fewer tax savings. Each $10,000 in reduced value of one asset might be offset by a $10,000 gain in the value of another piece of property.
Using the alternate valuation date can also affect the step-up in cost basis enjoyed by beneficiaries who later sell inherited assets. The stepped-up tax basis in an asset is its 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 might be liable for increased capital gains—he could realize more of a profit when and if he sells.
When and How to Make the Alternate Valuation Date Election
An executor must elect to use the alternate valuation date within one year of the due date of the federal estate tax return, IRS Form 706, including extensions. There's no way to request an extension for making the election, and it's irrevocable after it's made.
The executor makes the election by indicating so on line 1 of part 3 of IRS Form 706.
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 alternate valuation date? In this case, the value of the property must be determined as of the date of sale, distribution, or other disposition. The value doesn't automatically revert back to the date of death.