How to Determine Estate Tax Valuation

Settling an estate involves accounting for a decedent’s assets to determine if federal estate tax is owed. This requires valuing everything the person owned or had an interest in at death, with the total value constituting the “gross estate.” Federal tax law provides a substantial exemption ($13.99 million per individual in 2025), so most estates do not pay this tax. However, this exemption is scheduled to be reduced by about half at the beginning of 2026, making precise valuation for estates exceeding the threshold necessary for calculating tax liability.

The Fair Market Value Standard

The guiding principle for valuing all estate assets is “Fair Market Value” (FMV). The IRS defines FMV as the price at which property would change hands between a willing buyer and a willing seller, where neither party is under any compulsion to act and both have reasonable knowledge of all relevant facts. This standard is meant to reflect the true economic worth of an asset in an open market, not its original purchase price or a value determined by a forced sale.

For example, the FMV of a classic automobile is not the price a collector under pressure to complete a set might pay, nor is it the low price offered by a dealer aware the seller needs cash immediately. It is the realistic price a knowledgeable buyer would offer a knowledgeable seller, both acting freely. Unless a special valuation method is elected, this objective standard is the mandatory starting point for every asset in the gross estate.

Determining the Valuation Date

An executor must select an official date for valuing estate assets. The primary and most common valuation date is the decedent’s date of death. On this date, the fair market value of every asset, from cash to real estate, is determined, establishing a baseline for the gross estate’s value.

The Internal Revenue Code provides an alternative: the Alternate Valuation Date (AVD). An executor may elect to value the estate’s property as of six months after the date of death. This option is useful if the value of the estate’s assets has decreased significantly, as it can lead to a lower estate tax bill, for instance, after a sharp decline in the stock market.

Making the AVD election is subject to strict requirements. The election is only permissible if it results in a decrease in both the total value of the gross estate and the amount of federal estate tax due. It is an all-or-nothing choice; an executor cannot pick and choose which assets to value on the alternate date. If an asset is sold or distributed before the six-month AVD, that asset is valued as of the date of its sale or distribution. The decision is made on the estate tax return and is irrevocable.

Valuing Different Types of Assets

Publicly Traded Stocks and Bonds

For stocks and bonds traded on an established exchange, the value is the average of the highest and lowest selling prices on the valuation date. This method provides a more representative value than a single price point. If the valuation date falls on a weekend or holiday, the value is determined by a weighted average of the mean prices on the trading days immediately before and after the valuation date.

Real Estate

Valuing real estate requires a formal appraisal prepared by a qualified appraiser. The appraiser will conduct an analysis, considering factors such as comparable sales of similar properties, the property’s condition, its location, and current market trends. The final appraisal report provides a detailed justification for the determined fair market value.

Closely Held Businesses

Valuing an interest in a closely held business—a company not publicly traded—requires a specialized business valuation expert. The valuation considers financial statements, cash flow, earning capacity, and the economic outlook for the specific industry. A “discount for lack of marketability” may be applied because private shares are not easily sold, and a “minority interest discount” may be appropriate if the decedent owned less than 50% of the company, reflecting an inability to control business decisions.

Tangible Personal Property

This category includes assets such as jewelry, art, antiques, collectibles, and vehicles. For items of significant value, an appraisal from a qualified expert in that specific field is necessary. For example, a valuable painting should be appraised by a certified art appraiser. For household goods of lower value, a room-by-room itemization with estimated values by the executor may suffice.

Annuities, Life Insurance, and Notes

The valuation of annuities, life insurance policies owned by the decedent on another person’s life, and notes receivable is generally direct. An annuity is valued based on the cost of a comparable contract from the issuing company. A life insurance policy is valued at its replacement cost. For a promissory note, the value is the unpaid principal plus any accrued interest, unless factors like the debtor’s insolvency justify a lower value.

Special Valuation Elections

The tax code offers a relief provision for certain family-owned farms and closely held businesses. Under Internal Revenue Code Section 2032A, an executor can elect to value qualified real property based on its “current use” rather than its “highest and best use.” For example, farmland could be valued for its agricultural use, which is typically much lower than its potential value if sold for development. This can result in a significant reduction of the gross estate and the corresponding estate tax.

Eligibility for this special use valuation is governed by strict rules. The decedent must have been a U.S. citizen, and the property must meet criteria regarding its location and use in a qualified business. A significant portion of the adjusted gross estate must consist of the farm or business assets, and the property must pass to a qualified heir who agrees to continue the qualified use for ten years.

The election carries long-term obligations for the heirs. If the qualified heir disposes of the property or ceases the qualified use within the ten-year period, an additional estate tax, called a recapture tax, is imposed. This tax is based on the tax savings realized from the initial special use valuation.

Reporting Valuations on the Estate Tax Return

Once the executor has determined the fair market value of all assets and selected the appropriate valuation date, the final values must be reported to the IRS. This is done by filing Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. This return is required for estates exceeding the federal exemption amount.

Different types of assets are reported on specific schedules attached to Form 706. For instance, Schedule A is used for real estate, Schedule B for stocks and bonds, and Schedule F for other miscellaneous property. Each schedule requires a detailed description of the asset and its determined fair market value. Supporting documentation, such as copies of all formal appraisals for real estate, business interests, and valuable personal property, must be attached to the return.