Valuation of Estate Assets
Fair value must be established for assets included in an estate. Some valuations, such as the values of stocks and bonds traded on recognized exchanges, pose no problems. For other assets, such as property, jewelry, art objects, or antiques, a competent appraisal in writing should be obtained. Assets are included in the estate at their fair value on the date of death or on an alternate valuation date, if the executor or administrator so elects. If the alternate valuation date is elected, all estate property must be valued as of six months after the decedent’s death, except for property sold, distributed, or otherwise disposed of during the 6-month period. Such property is valued as of the date of disposition. The alternate valuation date may be used only if it would reduce the total gross estate and decrease the estate tax liability. The alternate valuation date protects estates if there should be a significant decrease in property values during the 6-month interval.
Fair value must be established for assets included in an estate. Some valuations, such as the values of stocks and bonds traded on recognized exchanges, pose no problems. For other assets, such as property, jewelry, art objects, or antiques, a competent appraisal in writing should be obtained. Assets are included in the estate at their fair value on the date of death or on an alternate valuation date, if the executor or administrator so elects. If the alternate valuation date is elected, all estate property must be valued as of six months after the decedent’s death, except for property sold, distributed, or otherwise disposed of during the 6-month period. Such property is valued as of the date of disposition. The alternate valuation date may be used only if it would reduce the total gross estate and decrease the estate tax liability. The alternate valuation date protects estates if there should be a significant decrease in property values during the 6-month interval.
Formerly, it would have been possible for a fiduciary, knowing that there would be no estate tax to pay, to select the alternate valuation date if assets increased in value, thereby giving the heirs a higher basis for their inherited property, at no cost to the estate. To prevent this windfall, Congress took an action that permitted election of the alternate valuation date only if it would reduce the total gross estate and decrease the estate tax liability.
Congress felt it was being sufficiently generous by permitting a stepped-up basis. Recall that, to the recipient, the basis of property acquired from a decedent is fair value on the date of death or alternate valuation date. That regulation may result in a step-up of basis. For example, assume Jane Jacoby held stock with a cost of $100,000. At the date of her death, it was worth $500,000 and was willed to her nephew, whose basis now becomes $500,000. A subsequent sale by him for $500,000 would result in no taxable gain. Although the value of the stock must be included in the inventory of the estate, which would be subject to the unified transfer tax only if the estate is large enough, the $400,000 gain would escape federal income taxation because of the stepup in basis. If Jane had sold the stock before her death, the gain would have been subject to income tax. Tax planning would suggest that, if possible, property that has appreciated substantially in value should be held as part of an estate because of the advantage of the step-up in basis. The opposite is true if there is a substantial decline in value. If Jane’s stock had a value of $5,000 on the valuation date, that would become the basis to her nephew. Neither he nor the estate would derive any income tax benefit from the $95,000 loss in value. If Jane had sold the stock prior to death, benefits resulting from the deductibility of the loss for income tax purposes would have materialized.