IRC 2031: Definition and Valuation of Gross Estate

Internal Revenue Code Section 2031 serves as the foundational starting point for the calculation of federal estate tax. This section of the tax law establishes the concept of the “gross estate,” which is a comprehensive accounting of all assets a person owns or has an interest in at the time of their death. Understanding what constitutes the gross estate is the first step in a multi-step process to determine if any estate tax is owed.

Defining the Gross Estate

The gross estate is defined as the value of all property—real or personal, tangible or intangible—in which the decedent had an interest at the time of death, regardless of where it is located. This broad definition is designed to capture the total worth of an individual’s assets before any debts or deductions are considered. The specific assets that must be included are detailed in IRC Sections 2033 through 2044.

Includable property covers obvious assets like cash in bank accounts, publicly traded stocks, and bonds. Real estate holdings, including a personal residence or rental properties, are also a component of the gross estate. The value of business interests, whether from a sole proprietorship, a partnership, or a closely held corporation, must be accounted for as well.

The gross estate also includes proceeds from life insurance policies if the decedent retained any “incidents of ownership,” such as the right to change the beneficiary. Retirement accounts like 401(k)s and IRAs are part of the gross estate, as are various annuities. Personal property, ranging from vehicles and jewelry to valuable art and collectibles, is also tallied. Certain types of trusts where the decedent retained control or an interest may also be pulled back into the estate.

Determining Fair Market Value

Once all assets in the gross estate have been identified, the next step is to assign a value to each one. The standard for this valuation is “Fair Market Value” (FMV), which is the price at which property would change hands between a willing buyer and a willing seller, with neither being under any compulsion to act and both having reasonable knowledge of the relevant facts. This valuation is determined as of the date of the decedent’s death, and the goal is to establish a realistic market price, not a forced sale price.

The method for determining FMV varies depending on the type of asset. For publicly traded stocks and bonds, the value is the average of the highest and lowest selling prices on the date of death. If there were no sales on that specific date, a weighted average of sales on the nearest days before and after is used.

Valuing other assets often requires professional expertise. Real estate, for instance, necessitates an appraisal from a qualified professional to determine its market value. Assigning a value to a closely held business interest is complex and requires a specialized business valuation expert. For unique personal property, such as fine art or antiques with a total value exceeding $3,000, an expert appraisal is also required to be filed with the estate tax return.

Special Valuation Rules

While the general rule is to value assets at their Fair Market Value on the date of death, the Internal Revenue Code provides specific exceptions an executor may elect to use. These elections have strict requirements. The two primary options are the Alternate Valuation Date and the Special Use Valuation.

Alternate Valuation Date

Under IRC Section 2032, an executor can choose to value the estate’s property on the “alternate valuation date,” which is six months after the date of death. If an asset is sold or distributed within that six-month period, it is valued on the date of its disposition. This election can only be made if it results in a decrease in both the total value of the gross estate and the federal estate tax owed. This is useful when the market value of estate assets has declined following the decedent’s death. The election is irrevocable and applies to all assets in the estate.

Special Use Valuation

For estates with qualifying farms or closely held family businesses, IRC Section 2032A offers another valuation tool. This provision allows the real property to be valued based on its “current use” rather than its “highest and best use.” For example, farmland could be valued for its agricultural use instead of its potential value as commercial development. This can reduce the property’s value for estate tax purposes, with the maximum reduction for 2025 capped at $1.42 million.

To qualify, the property must meet several criteria:

• The adjusted value of the real and personal property used in the business must be at least 50% of the adjusted gross estate.
• The real property alone must constitute at least 25% of the adjusted gross estate.
• The decedent or a family member must have materially participated in the business for five of the eight years preceding death.
• The property must pass to a qualified heir who agrees to continue the qualified use for at least 10 years to avoid a recapture of the tax savings.