Estate Tax Alternate Valuation
Some of the hardest times of our lives come when a loved one passes away. On top of dealing with the emotions that come with dealing with the loss, the financial affairs of the deceased need to be addressed. Determining the value of the estate can be a difficult task and is essential in determining possible estate taxes and the carrying out of the decedent’s last will and testament.
Currently the law allows a deceased person to transfer up to $5,000,000 of property to their heirs without incurring an estate tax (some think of this as an inheritance tax) on the transfer. While this covers a larger proportion of the U.S. taxpayers, with the property values and earnings of Californians being much higher on average than much of the nation, it is important that families understand that this limit may drop (possibly back to $1,000,000 per person) and engage in estate planning to better understand and plan for transfers upon death to prevent surprises and minimize any potential estate tax liability.
Unfortunately, valuing the estate is not as easy as just adding up all of the bank accounts. Aside from the challenges of determining which assets need to be included in the estate, the value of the decedent’s other non-cash assets needs to be determined. This could includes appraisals of the decedent’s home, cars, rental properties, investment accounts, life insurance, businesses, partnerships, and annuities. Having a professional to help guide you through the process is strongly suggested.
In general, a decedent’s property is valued as of the date of death for estate tax purposes. However, an election is available to a decedent’s executor to use an alternate valuation date. This election allows property held in the estate to be valued as of the date exactly six months after the date of death. Additionally, property that is sold, exchanged, or otherwise disposed of within the six-month period after the date of death is valued as of the date of distribution or other disposition.
If the election is made, it will have a dual impact: both on the value of estate assets for estate tax purposes and on the basis that the heirs receive in the assets passing to them. In general, a heir’s basis in an asset is equal to asset of the assets used for the estate tax return purposes (except for retirement accounts or other annuities that involve deferred income).
The alternate valuation election can be made by the executor only if it will reduce the value of the gross estate and the combined estate and generation-skipping transfer (GST) tax liability. It cannot be made on an asset-by-asset basis; it must apply to all estate property.
The election was designed to take into account a sudden large drop in the value of property included in the estate. For example, if shortly after death the stock or real estate market plummets and, as a result, the value of the estate’s property drops substantially, the election can prevent the estate tax from being based on the higher date-of-death value.
November 2011
Pursuant to IRS Circular 230, the Internal Revenue Service requires us to inform you that any tax advice included herein is not intended or written to be used, and it cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed by the IRS on the taxpayer. That said, please do not hesitate to contact us if you have any further questions regarding this matter.
Tags: Estate Tax
