What is Alternate Valuation Date?
The alternate valuation date in estate tax planning refers to a special rule under the federal tax code that allows people to use the value of an estate six months after a death rather than the value at the date of death when reporting taxable assets to the IRS. By doing so, estates can potentially save money on estate taxes. In some circumstances, family members can benefit even more if the alternate valuation date generates losses that can be used to offset gains on which tax would otherwise have to be paid.
Anyone who has significant assets should consider whether the alternate date provision applies to his or her situation . The alternate valuation date rule can save money, as well as potentially eliminate tough decisions about gaining or selling certain property close in time to the death when one wishes to pass appreciated assets to beneficiaries and is not concerned about when beneficiaries choose to sell property.
There are a few different situations that can trigger the use of the alternate valuation date rule. You may want to consider this rule during your estate planning if an estate is complex or has uncertain or highly volatile assets that might have extreme swings in value. For example, if stock trading is a business for a close relative or a family business, using the alternate date may have a big impact on determining the tax owed on the entire estate.
Key Differences Between Date of Death and Alternate Valuation Date
The alternate valuation date is often used to minimize a decedent’s estate tax liabilities by deferring taxes on capital gains and allowing planners greater flexibility in identifying the beneficiaries of trust distributions. A big disadvantage, though, is that assets held by the decedent can’t then be stepped up to their date-of-death values. For these reasons, you should weigh the pros and cons carefully before deciding whether to use the alternate valuation date, which must be elected on the estate tax return (Form 706).
Thirteen-Month Window
For estate return purposes, an estate can elect to value its property as of the earlier of the decedent’s date of death or six months after the date of death, known as the alternative valuation date. If the election is made, the value of the decedent’s property as of the alternate valuation date generally will be determinative of the gross estate except in three specific situations — when the alternate date: Because the value of appreciated property is likely to go up over time, the deferral of capital gains taxes can be substantial.
Qualifying for Alternate Valuation Date
Eligibility for Alternate Valuation Date must be qualifed by circumstances. It could not be used to merely get a step-up in basis on property which had appreciated during the decedent’s life. The effect of the election would be that all property was valued as of the date six month after decedent’s death and this would reduce overall estate tax. However, if the property were appreciated it would provide a basis step-down on the property so as to produce a larger gain if distributed to the surviving spouse. In this latter case the end result would be double taxation of the same property. The way the law worked to prevent double taxation was that the basis established in the trust would be used if the property was sold in the estate to pay estate tax. The basis step-down in the surviving spouse’s estate would still occur if the surviving spouse were to sell the property.
The executor or administrator of the estate is the individual who uses alternate valuation date. Also, they must make the election. The election is made if the estate tax return is filed within nine months after decedent’s death. Factors determining eligibility include:
It is important to note that the executor must elect the alternate valuation date and cannot be forced by heirs or beneficiaries to make the election. I might also note that if the estate is not subject to estate tax the election would not be to the advantage of the estate.
How Alternate Valuation Date Affects Tax
Since the alternate valuation date provision may be used to avoid or defer the imposition of estate tax, as opposed to simplifying or reducing the overall tax burden, the IRS closely monitors its application. Both the Tax Court and the Internal Revenue Service have ruled against the alternate valuation provision where the abuse of the rules is clearly evident. As a general rule, if the executor or administrator of an estate sells property on or before the date that the estate tax return is due, including extensions, the alternate valuation date cannot be used.
For example, in Estate of Hungerford v. Commissioner, the decedent had owned stock, which appreciated rapidly and then became worthless. The stock was valued at $275,000 five months before death, but just two months later it was sold for $10,000. The executor filed the estate tax return four months after the alternate valuation date would otherwise have expired. The assets remaining on the alternate valuation date were valued at $12.8 million. No significant distributions were made prior to the alternate valuation date. The estate was valued at more than $12 million when it could have been valued at slightly less than $10 million. The court held that because the decedent’s son who was named executor made aggressive attempts to buy the stock for his own account which did not materialize, but the decedent’s executor succeeded in selling it quickly for more than 25 times its value and slightly below its original cost, the alternate valuation date could not be used.
In Nichols v. United States, 58 F. Supp. 2d 182 (N.D.N.Y. 1999), the trial court deferred to the IRS ruling on this issue to hold that an executor could not lose the benefits of the alternate valuation date simply because a strategy used within the one-year period reduced the value of the estate. Unlike those cases where all the cash was converted to high-risk investments and then lost, the use of the alternate valuation date in Nichols resulted in the estate saving millions of dollars in estate tax.
Procedural Aspects of Electing Alternative Valuation Date
The procedure for electing the alternate valuation date depends on whether the election is made on a Federal Estate Tax Return, or in the case of a small estate, a State of Connecticut Estate Tax Return.
Federal Estate Tax Return (IRS Form 706). The executor of the decedent’s estate must make the election in accordance with the instructions for the form and by filing a timely Federal Estate Tax return (Form 706). The return must be prepared and filed as if the value of all of the assets were to be determined on the alternate valuation date. If an election is made, then the alternate valuation date will apply to all property included in the gross estate, to all property includible in the gross estate under sections 2034, 2035, and 2038, and to all property for which the executor receives a deduction under Chapter 11 (like property passing to the spouse), except to the extent that the executor elects otherwise. This means that once the executor makes the alternate valuation election, the alternate valuation date must be applied to every asset in the gross estate.
In the case of property passing to the spouse, or to other property to which deductions under Chapter 11 are allowed, the executor may elect to continue to value those specific properties as of the date of the decedent’s death. However, if the decedent’s gross estate exceeds the sum of the marital and charitable deductions, then only the excess may be applied.
State of Connecticut Estate Tax Return (Form CT-706/CT-706NT) . Alternatively, if the decedent’s gross estate is less than $10,000,000 (including qualifying prior gifts in the 2 years prior to death) and it is not required to file a Federal estate tax return, the executor must elect the alternate valuation date on the Connecticut Estate Tax Return. In this case, the election must be made for real property and tangible personal property, but only special use property that passes to the spouse as part of the gross estate (such as farmland) needs to be formally elected.
Executor’s Power to Revise. The executor of a decedent’s estate is permitted to revise an election of alternate valuation within six months after the due date for filing the return, provided that the return has not been filed.
In addition, if an election is made and the executor subsequently becomes aware that it is not advantageous, the executor is permitted on a supplemental return (Form CT-706, without a Form CT-706NT) to elect to recapture the alternate valuation date election within six months after the executor learns that it was not advantageous. In making this election, the executor has the burden to prove that the value on the alternate valuation date (rather than the date of the testator’s death) does not result in the least amount of tax. If the alternate valuation remains elected, the estate cannot attempt to revoke or otherwise change the alternate date election or change the property to which the election applied in any manner, except to elect on a supplemental return in accordance with the preceding sentence.
Alternate Valuation Date FAQs
Below are some common questions and misconceptions about alternate valuation date rules:
What property qualifies for alternate valuation date treatment?
Some rules are different for the point in time when a decedent passes, but in general, a decedent’s property qualifies for alternate valuation if it is included in the decedent’s estate as of the date of valuation. Generally, all real and tangible property in the estate qualifies. Certain intangible assets must also be accounted for.
How do I value property using an alternate valuation date?
Alternate valuation involves taking an inventory of the estate property as of the alternate valuation date. Once the inventory is complete, each asset must be assigned a fair market value amount using the two dates’ values for each property to determine the discount.
Is it complicated to value property as of its alternate valuation date?
Valuing property as of the alternate valuation date is not necessarily difficult. However, it requires numerous tasks to accomplish its goal to minimize estate tax. Most of these tasks require specialized training and appraisal qualifications to perform accurately.
Can I claim an alternate valuation date if I filed a final Form 1041?
As long as the alternate valuation date was elected on the estate tax return, there is no reason why a final Form 1041 cannot be filed at any time during the three-year period mentioned above.
Conclusion – Planning Implications
The decision to elect an alternate valuation date is a critical election. It will impact the amount of taxes finally owed, the beneficiaries of the estate and the assets included in an estate for purposes of computation of federal and state estate taxes and gains recognition for income tax purposes.
It is important to consider the date of delayed, alternate or current valuation carefully in light of expected changes to federal and state tax laws . Alternate valuation date valuations may be adjusted upon a subsequent change in valuation law, whether it be a retroactive change in the valuation method for federal estate tax purposes or an audit and corresponding adjustment for state estate tax purposes. For this reason, the alternate valuation date should be a consideration of the estate initial return preparation process. Such consideration, in addition to its estimation impact on the ultimate tax cost to the estate at the time of death, should be based upon the goals of the decedent and ultimate beneficiaries.
