Do You Know How to Calculate the Value of Your Estate?
Learn How to Determine the Value of an Asset for Estate Tax Purposes
Estate valuation is the process of calculating the value of a gross estate for federal estate tax purposes. The Internal Revenue Code provides for two values: the "date of death" value or the "alternate valuation date" value.
The gross estate is the value of its assets and property before taxes and debts are deducted. It includes all property owned by the decedent or in which he has an interest, regardless of whether the assets are subject to probate.
Using Date of Death Estate Valuation
The date of the death estate valuation is the fair market value of each asset of the estate as of the decedent’s actual date of death.
- For bank, investment and retirement accounts, this would be the statement values on the date of death.
- With publicly traded stocks held outside a brokerage account, the average of the high and low prices on the date of death is multiplied by the number of shares the decedent owned. If the death occurs on a day when the stock market is closed, the average prices for the stock on the trading days immediately before and after the date of death are used.
- The fair market value of personal effects, business interests and real estate as of the date of death is typically determined by appraisal.
Using the Alternate Valuation Date
The alternate valuation date value is the fair market value of all assets included in the decedent’s gross estate six months after the date of death.
Under the Internal Revenue Code, the personal representative is permitted to choose whether to use the date of death values or the alternate valuation date values if the estate is substantial enough to be subject to federal estate taxes and if using the alternate date reduces the value of the gross estate.
As of 2016, only estates with gross values of more than $5.45 million are subject to estate taxation.
Why Use One or the Other?
Why would the personal representative choose the alternate valuation date values instead of the date of death estate valuation option? Because if one or more of the estate's assets have lost significant value during the six months after death, the estate tax bill can be reduced. If the alternate valuation date values are used, however, then all the estate's assets must be revalued, not just those that have gone down in value.
What happens if an asset is sold during the six months after the date of death? Then the sales price of the asset must be used.
The big downside to using the alternate valuation date values is that the step-up in basis that beneficiaries receive is locked in at the lower values. This can affect their capital gains liability should they later decide to sell their inheritances.
Normally, a taxpayer's basis would be what he paid for the asset, plus the cost of capital improvements. He pays capital gains tax on the difference between that and the sales price. His basis in inherited property is its value as of the date of valuation for estate tax purposes, so the lower the valuation, the more likely it becomes that he will realize capital gains if he sells.