Taxes on the transfer of wealth upon death can be substantial. The tax burden, which is typically based on the value of the estate assets on the date of death, can be additionally painful if the value of the transferred assets declines in value after the date of death. In extreme cases, the tax on an asset at the date of death could exceed the value of the asset just a few months later. In cases like this, IRS Code Section 2032 allows for estates to elect an alternate valuation date if the value of the assets held by the estate decrease in value after the date of death.
Availability of the Election
In general, the alternate valuation election is available if the following requirements are met:
- The estate must be subject to federal estate tax (in 2020, estates greater than $11,580,000 are subject to federal tax)
- The use of the alternate date must reduce the value of the gross estate and the amount of federal estate tax due
Date of Alternate Valuation
If the alternate date is elected, all estate assets are valued six months after the date of death. The exception to this is if an asset is sold, exchanged, distributed to a beneficiary, or otherwise disposed of within six months of death. In this case, the asset is valued as of the date of disposition.
Valuing the Assets
If the alternate valuation is elected, the values of the assets on both the date of death and the alternate valuation date must be determined and shown on the return to demonstrate the circumstances meet the above requirements. If a business interest is part of the estate, a qualified appraisal of the interest must be completed as of both dates.
Should You Elect?
The advantages of using the alternative date are clear. Lowering the value of the gross estate (a requirement for the election) lowers the resulting estate tax. Seems automatic, right? Electing the alternate date is not always a clear answer. If the election is made, the basis in the assets that are transferred to the beneficiaries is set at the lower, alternate value. The future income tax consequences of this drop-in basis should be considered before making the election. Attention should be given to the following factors on an asset-by-asset basis:
- The estate tax bracket
- Whether the unlimited marital deduction is available
- The future tax benefits available on any depreciable assets
- Whether the assets will be sold by the estate or beneficiary during his/her lifetime
A tax expert can help you determine if an alternate valuation date election is the right thing to do given the facts and circumstances surrounding your situation. Contact Scott Hoyles, CPA/ABV/CGMA, MBT or Tony Oman, MBA, ASA/BV, for more information.