How to Calculate the Value of Your Estate
Estate Valuation for Estate Tax Purposes
Estate valuation is the process of calculating its value for federal and state estate tax purposes. It's not only the major component of determining whether an estate is liable for the tax, but it can be an invaluable tool in estate planning as well.
You can take steps during your lifetime to prevent an estate tax, or at least to reduce it, if it appears likely that your estate might be liable for the tax when you die.
Net Estate vs. Gross Estate Values
The term "gross estate" refers to the value of assets and properties before taxes and debts are subtracted. The estate tax is based on the net value of an estate, however—whatever remains after taking all available deductions, credits, and payment of liabilities into consideration.
Available deductions, credits, and exemptions can differ between federal estate taxes and state-level taxes. Twelve states and the District of Columbia have an estate tax as of 2019.
Liabilities can include payment of mortgages and other secured loans, credit card balances owed by the decedent, and all other debts. The costs incurred in processing an estate are deductible, as are state-level estate taxes at the federal level. Gifts made to charities and the value of assets transferred to a spouse can also be deducted.
Assets include properties that are wholly owned by the decedent, as well as those in which the decedent held only a partial equity interest, such as jointly-owned property held with a spouse. In this case, 50% of the property's value would be attributable to the decedent's estate.
Assets that are subject to probate as well as assets held in revocable living trusts are factored into the calculation. Assets held in an irrevocable trust are not part of the decedent's estate for tax purposes.
Only estates with net values of more than $11.4 million are subject to the estate tax on the balance over this exemption as of 2019.
Date of Death Estate Valuation
The Internal Revenue Code provides for two valuation dates: the "date of death" or the "alternate valuation date."
The "date of the death" estate valuation refers to the fair market value of each estate asset at the time of a decedent’s death. This would be the statement values as of that date for bank, investment, and retirement accounts.
The average of the high and low prices on the date of death is multiplied by the number of shares the decedent owned for publicly-traded stocks held outside a brokerage account. The average prices for the stock on the trading days immediately before and after the date of death are used if the death occurs on a day when the stock market is closed.
The fair market values of more valuable personal effects, business interests, and real estate properties are typically determined by a qualified appraiser.
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.
The personal representative, executor, or trustee of an estate is permitted to choose whether to use date of death values or the alternate valuation date values if the estate is substantial enough to be subject to federal estate taxes.
Alternate Valuation Date vs. Date of Death
Using the alternate valuation date can reduce the value of the estate if assets are expected to depreciate for any reason during the six months after death. The estate tax bill can thereby be reduced or eliminated entirely.
But there's a catch: All the estate's assets must be valued as of that alternate date, not just those that have declined in value. The executor can't use date of death values for some and alternate valuation date values for others, effectively picking and choosing the best option for each asset.
Some assets might increase in value over six months, potentially erasing any reduction in the overall estate value achieved by assets that have depreciated. In a worst-case scenario, this method might even result in an increased estate value over what it was six months earlier. The decision should be weighed carefully, ideally with help from a tax professional or attorney.
The sales price of an asset must be used if it's sold during the six months after the date of death and the alternate valuation date method has been chosen.
The Effect on Capital Gains
Another potential downside to using the alternate valuation date is its effect on the step-up in basis which beneficiaries receive for capital gains tax purposes. A beneficiary's cost basis in an asset is either the date of death value or the alternate valuation date value, whichever is elected when the estate settles.
A taxpayer's basis in an asset is normally the dollar amount paid for an asset plus the cost of capital improvements. The taxpayer pays capital gains tax on the difference between that combined figure and the sales price.
This can affect their tax liability should they later decide to sell their inheritances. The lower the valuation, the more likely beneficiaries will realize capital gains when and if they decide to sell.