Date of Death Valuation for Estate Tax Explained

When an individual passes away, a process known as date of death valuation begins. This is the appraisal of all the decedent’s assets to determine their fair market value on the specific day the person died. This valuation is foundational for calculating any potential estate taxes and ensuring that assets are distributed correctly to the designated heirs and beneficiaries.

Valuation Methods for Common Estate Assets

The standard for valuing estate assets is “fair market value,” which is the price a willing buyer would pay to a willing seller, with both parties having reasonable knowledge of the relevant facts. This principle is applied differently across various asset types, requiring specific methodologies to arrive at an accurate number. The methods range from simple verification to complex appraisals, depending on the nature of the asset.

For assets like cash, checking accounts, and savings accounts, the valuation is straightforward. The value is the total amount of money in these accounts on the date of death, including any accrued but uncredited interest. This can be verified by obtaining statements from the financial institutions that hold the accounts.

Valuing publicly traded stocks and bonds requires a more specific calculation. The fair market value is determined by averaging the highest and lowest selling prices of the security on the date of death. If the death occurred on a weekend or a holiday when the market was closed, the value is the weighted average of the high and low prices on the trading days immediately preceding and following the date of death.

Real estate holdings, such as a primary residence or investment properties, necessitate a formal appraisal. This must be conducted by a qualified and often state-licensed real estate appraiser. The appraiser analyzes recent sales of comparable properties, the property’s physical condition, its location, and current market trends to determine its fair market value as of the date of death.

Tangible personal property includes a wide range of items, from household furniture and vehicles to more valuable assets like jewelry, art, and collectibles. For common household goods, an executor may be able to make a good faith estimate of their value. High-value items, however, require a formal appraisal from a specialist in that particular field, such as a gemologist for jewelry or an art expert for paintings.

Determining the value of a closely held business interest, such as a family-owned company or a partnership share, is a complex valuation task. This process requires a certified business valuation expert. These professionals use established methodologies, including asset-based, income-based, or market-based approaches, to arrive at a defensible value.

Understanding the Alternate Valuation Date

An executor has the option to value the estate’s assets using an alternate valuation date (AVD) instead of the date of death. This date is six months after the date of death. This provision is designed as a form of relief for estates whose assets have decreased in value shortly after the decedent’s death.

The election of the alternate valuation date is subject to strict requirements. An executor can only choose the AVD if doing so decreases both the total value of the gross estate and the amount of federal estate tax owed. It is not an option if it would result in a higher valuation or no change in tax liability.

This election is an all-or-nothing decision. An executor cannot selectively apply the AVD to some assets while using the date of death value for others. This lack of flexibility requires a careful analysis of the entire estate’s portfolio before making the election, as a decline in one asset could be offset by an increase in another.

A special rule applies to any asset that is sold, distributed, or otherwise disposed of within the six-month period following the date of death. If the AVD has been elected, these specific assets are valued as of the date of their sale or distribution, not the six-month mark. For example, if a stock is sold two months after the date of death, its value for estate tax purposes is its selling price on that day.

Reporting Asset Values on the Estate Tax Return

Once the executor has valued all assets, the information must be formally reported to the IRS. The primary document for this is Form 706, the United States Estate Tax Return. This return is required for estates exceeding the federal exemption amount for the year of death.

The determined values are reported on various schedules attached to Form 706. For instance, real estate is detailed on Schedule A, stocks and bonds on Schedule B, and mortgages and debts on Schedule K. Each schedule requires specific information about the assets, including descriptions and their calculated fair market value.

If the executor decides to use the alternate valuation date, this election must be formally made on the Form 706 itself. There is a specific checkbox on the return that must be marked to notify the IRS of this choice. Failing to properly make this election on a timely filed return can result in the forfeiture of the right to use the AVD.

To substantiate the values reported on the return, the estate is required to attach supporting documentation. This includes copies of written appraisals for assets like real estate, closely held businesses, and valuable tangible personal property. For publicly traded securities, records of the high and low trading prices may be needed.

How Valuation Determines a Beneficiary’s Cost Basis

The valuation of assets for estate tax purposes has a direct financial consequence for the beneficiaries who inherit them. This impact is realized through a tax concept known as “cost basis.” An asset’s cost basis is the value from which capital gains or losses are calculated when the asset is eventually sold.

For inherited assets, the beneficiary’s cost basis is “stepped up” or “stepped down” to the fair market value of the asset on the decedent’s date of death. If the executor elected the alternate valuation date, then that value is used instead. This means the beneficiary’s basis is not the original price the decedent paid for the asset.

This step-up in basis can provide a substantial tax benefit. For example, if a decedent purchased stock for $10,000 and it was worth $100,000 on the date of death, the beneficiary who inherits it receives a new cost basis of $100,000. If that beneficiary immediately sells the stock for $100,000, they would have no capital gain and owe no capital gains tax.

The valuation process is a foundational step in determining the future income tax liability for heirs. An accurate and well-documented valuation ensures that beneficiaries receive the correct cost basis for their inherited property, which minimizes the potential for future tax burdens.