How to Calculate the Value of Your Estate
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 refers to the value of its assets and properties before taxes and debts are deducted. This includes both properties that are wholly owned by the decedent, as well as those properties in which decedents had partial equity interests. Assets that may be subject to probate, are also factored into the calculation.
Date of Death Estate Valuation
The "date of the death" estate valuation refers to the fair market value of each underlying estate asset, at the time of a decedent’s 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 values of personal effects, business interests and real estate properties, as of the date of a death, are typically determined by a qualified appraiser.
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.
Alternate Valuation Date vs. Date of Death Estate Valuation
A personal representative would choose the alternate valuation date values over 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. Contrarily, if the alternate valuation date values are used, then all the estate's assets must be revalued--not just those that have declined in value. 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 chief downside to using the alternate valuation date values, is that the step-up in basis which beneficiaries receive is locked in at the lower values, which can affect their capital gains liability, should they later decide to sell their inheritances.
Normally, a taxpayer's basis is the dollar amount paid for the asset, plus the cost of capital improvements. The taxpayer pays capital gains tax on the difference between that combined figure, and the sales price. Their basis in an inherited property is its value as of the date of valuation for estate tax purposes. Consequently: the lower the valuation, the more likely they will realize capital gains, if they sell.