Alternate Valuation Date

Summary:

When you die the estate tax is assessed on the value of the assets you owned on the date of your death. In case you haven't noticed, asset values have been declining lately. If your estate were taxed on the date of death values, nine months later when the tax is paid, the value of the estate might have declined to the point where the tax is as much as the value of your assets. To minimize this unfairness the tax laws permit your estate to value assets at the date six months after your death if the values and tax are lower. This is called the alternate valuation date and is contained in Code Section 2032.

√ Gee another tax rule. Do you care? Well, if you're an executor and don't make the election and should have, you could be held personally liable if the alternate valuation could lower taxes. Re Lohm Est., 269 A.2d 451 (Pa. 1970).  Got your attention?

√ The election is made by the executor on the estate tax return and is irrevocable.

√ The election must apply to all estate assets, no partial application is permitted. Treas. Reg. Sec. 20.2032-1(b)(2).

√ Assets which are distributed, sold, exchanged, or otherwise disposed of, before the 6 month date after death are valued as of the date they were distributed, sold, exchanged, or otherwise disposed of. A transaction which is a mere change in form is not considered sold, exchanged, etc. and is valued at the 6 month date. Treas. Reg. Sec. 20.2032-1(c).

√ Patents, life estates, remainders and reversions that are affected by a mere lapse in time are valued as of the date of death and an adjustment to the 6 month alternate valuation date to reflect differences in value that is not due to the mere lapse of time. Treas. Reg. Sec. 20.2032-1(f).

√ If the alternate valuation approach is used, the value of an asset on the alternate valuation date becomes the beneficiary's income tax basis for that asset. IRC Sec. 1014(a)(2). Thus, the estate tax savings from electing alternate valuation may be offset by an increased income tax liability when the inherited property is later disposed of. You'll have even more fun and family harmony if the result of the election is to lower taxes for one heir while raising the overall tax costs for another.  Rumor is that the Hatfield-McCoy feud began over a 2032 election.

√ Some estates have restructured assets after death to reduce their value, then elected to use the alternate valuation date to lower their estate tax. The IRS viewed that like taking your finger off a checker piece then trying to move it anyhow - not playing by the rules. So they wrote new rules in Proposed Regulations Section 20.2032-1(f)(1).  These endeavor to prevent executors from taking actions that could lower the value of an estate asset and then electing alternate valuation. Specifically, the IRS tries to limit reductions in value to only those caused by market forces.

√ Choosing alternate valuation can affect the estate's qualification for special estate tax benefits that are based on certain assets exceeding specified percentage tests. If the relative value of different assets changes post-death these benchmarks could be met or missed.  These could include: Code Section 303 redemption of stock to pay death taxes if the value of the corporate stock exceeds 35% of the gross estate; Code Section 2032A requires that 25% or more of the adjusted value of the gross estate must constitute qualifying real property interests; or  Code Section 6166 requires that business interests exceed 35 percent of the adjusted gross estate to pay the estate tax in installments.

√ The retitling of the decedent's IRA ("John Doe") to an inherited IRA ("John Doe, Deceased, fbo Jane Doe") should not be considered a 2032 distribution so that the IRA will be valued at the six month date (assuming no sales of stock from the IRA).