Timing Asset Valuations for Estate Taxes
If you’re navigating asset valuations for an estate, you might be curious about the optimal timing. According to IRC Section 2032, estates have the option to elect an “alternate valuation” date, which is six months after the decedent’s date of death, under certain conditions.
In fluctuating markets, the value of assets can vary significantly within six months, impacting both the estate’s value and the resulting federal estate taxes. The IRS offers a choice for when to value assets, which might help reduce or even eliminate federal estate tax liabilities.
Understanding the Alternate Valuation Date
Typically, federal estate tax is based on the value of assets at the time of death. However, Section 2032 allows estates to choose an alternate valuation date, six months after death, if it benefits the estate by reducing both:
The total value of the estate
The amount of federal estate tax owed
To utilize this option, the executor must report the asset values at both the date of death and the alternate valuation date to the IRS.
When This Election Matters
This election is mainly relevant for large estates due to the estate tax exemption. For 2023, estates valued up to $12.92 million are exempt from federal estate tax. Only amounts exceeding this threshold are taxed, with rates up to 40% for amounts over $1 million. An alternate valuation date could potentially bring an estate’s value below the exemption threshold, avoiding federal estate taxes. Even if the estate’s value remains above this threshold, using the alternate valuation date might result in a lower tax liability compared to using the date of death value.
Key Considerations
Asset Dispositions: Assets distributed, sold, or otherwise disposed of within six months of death are valued as of the disposal date, regardless of the election. Assets with stable values, like bank accounts or life insurance, remain valued as of the date of death.
Irrevocability: The election is made on the estate tax return and is irrevocable, so it’s crucial for executors of sizable estates to understand this option before filing.
When This Election Matters
Comprehensive Application: The election applies to all assets within the estate, so it cannot be selectively applied to certain types of assets.
Capital Gains Implications: The alternate valuation date establishes a new tax basis for the assets, potentially leading to higher capital gains taxes when assets are eventually sold, due to the lower basis.
State Taxes: This election only affects federal estate taxes; state inheritance taxes might still be assessed based on the date of death values.
Proceed with Care
If an estate is near or at the exemption limit, it’s wise to obtain valuations for both the date of death and the alternate valuation date. However, a lower valuation doesn’t always equate to a better outcome.