When you’re dealing with a loved one’s estate, there can be a lot of foreign terms suddenly tossed at you. One of them may be alternate valuation date. This phrase may sound like gibberish and the explanation even more so. Figuring all of it out while dealing with your grief can be overwhelming.
What is the alternate valuation date?
All estates are subject to tax law, and some of them have to pay taxes. Usually, when a person dies, their estate’s value is determined by what the assets within the estate were worth on the date of his or her death. So, if an estate is worth $10 million on the date of death, that’s what the IRS will base its calculations on.
However, the estate can be re-valued six months after the date of death. This is what’s called the alternate valuation date. The IRS tax code allows this new value to be used on estate taxes with no penalty to the estate.
IRS 26 U.S. Code 2032
Getting technical for a moment, the section of the IRS tax code that refers to alternate valuation date is called: Title 26, Subtitle B, Chapter 11, Subchapter A, Part III, Section 2032. You can read it here if you want, but it’s a bit of a slog.
What you really need to know is below.
Why do I want an alternate valuation date?
If the value is big enough, the estate may owe taxes. However, how much it owes could vary depending on when the value of the estate is determined.
Let’s say the estate we talked about before was worth $10 million on the date the person died. Six months later, the market declines, and now the estate is worth $8.5 million. It’s much better to be taxed on the $8.5 million than it is on the $10 million.
What’s the downside?
Before you get too excited, there is a downside to the alternate valuation date.
You can only choose to take the value of the entire estate on the date of death or the value of the entire estate six months after the date of death. There is no in-between.
The IRS will not let you pick and choose which parts of the estate you want to value at the time of death and which ones you want to value six months after death. This is an all or nothing deal.
That means while some of the assets within the estate may be worth less six months later, others may be worth more. You have to do the work to estimate the value at that later date if you think this could be useful.
What’s the other downside?
There’s another wrinkle in choosing the alternative valuation date and that’s future income. Initially taking the lower estate value requires you to pay less in taxes, but remember that the lower value is what’s applied when the asset is distributed to the estate’s beneficiaries. If you choose to take the alternate (lower) value and that asset is later sold, then the alternate value is what’s used to determine how much profit is made (though possibly at a lower rate).
In other words, either way, the IRS is going to get it’s cut.
Are there any exceptions within the alternate valuation date tax code?
The only exception that the IRS allows for is if an asset within the estate is sold, exchanged, distributed, or disposed of in another way within the six months. If that’s the case, then the asset’s value will be determined based on the date that you disposed of the item from the estate.
Is there anything else I need to know about the alternate valuation date?
You have nine months from the date of death to tell the IRS that you want to use the alternate valuation date. You or your CPA will need to make an election when they file IRS Form 706 if you plan to use the alternate valuation date.
Once you make this choice and the form is submitted, there’s no going back. The election to use an alternate valuation date is irrevocable.
Another fun twist is that you have to exclude changes due solely to the passage of time. If you have a loan due to you, you can’t say it’s worth less only because payments have been made in the six months between the date of death and the alternate valuation date.
Is it better to take the alternate valuation date?
So, with everything you’ve learned about the alternate valuation date, is it better to take the value of an estate on the date of death or six months later?
Unfortunately, there’s no easy answer.
You and your CPA should examine several factors when weighing the alternate valuation date option including:
- Determine if the estate taxable at all;
- The tax bracket that the estate falls into;
- Is it on the estate for a married person;
- The relationship of the deceased to the estate’s beneficiaries;
- The future tax implications;
- The future tax benefits on depreciable assets;
- And whether the estate’s assets will be sold or passed down through inheritance.
For large estates, talk to a professional about whether or not an alternate valuation date is beneficial to you. Make sure you contact your CPA. You can also talk to us here at Towne Advisory Services about any estate valuation questions.