Section 2031: Definition and Valuation of a Gross Estate

When an individual passes away, federal law requires a valuation of their property to determine if any estate tax is owed. This process is governed by the Internal Revenue Code, with the first step being the calculation of the “gross estate” under Section 2031. This figure represents the total value of everything the person owned or had an interest in at the time of their death. The executor of the estate is responsible for overseeing this valuation and reporting it to the Internal Revenue Service (IRS), as this value serves as the starting point for all tax calculations.

Defining the Gross Estate

The gross estate is a broad measure, and Internal Revenue Code sections 2033 through 2044 detail the assets that must be included. The goal is to capture the complete economic value of the decedent’s holdings. Common assets included in the gross estate are:

• Real estate holdings, such as a primary residence or investment properties.
• Financial assets like cash, bank accounts, stocks, and bonds.
• Personal property, including vehicles, furniture, jewelry, art, and collectibles.
• Interests in businesses, whether sole proprietorships, partnerships, or corporations.
• Proceeds from life insurance policies where the decedent held “incidents of ownership,” such as the power to change the beneficiary.
• Retirement funds, including 401(k)s and IRAs, as well as annuities.

Certain property transfers made during the decedent’s life may also be included, such as assets held in a revocable trust. For jointly owned property with a non-spouse, the entire value is included unless the surviving owner can prove they contributed to its purchase.

Determining Fair Market Value

Once all assets are identified, a value must be assigned to each using the “Fair Market Value” (FMV) standard. The IRS defines FMV as the price at which property would change hands between a willing buyer and a willing seller, where both parties have reasonable knowledge of relevant facts and neither is under compulsion to act.

For publicly traded stocks and bonds, the value is the average of the highest and lowest selling prices on the valuation date. This method provides a clear measure based on public market data.

Other assets require more specialized approaches. The value of real estate is established through a formal appraisal by a qualified professional who assesses the property and compares it to recent sales of similar properties. Tangible personal property of significant value, such as art or antiques, also requires a professional appraisal to determine its FMV.

Special Valuation Considerations

Certain assets lack a ready public market, presenting unique valuation challenges.

Closely Held Businesses

Valuing an interest in a closely held business often requires a certified business appraiser. Unlike public stock, shares in a private company are not easily sold. To account for this, valuation experts may apply discounts for lack of marketability or lack of control. These discounts reflect the difficulty of converting the interest to cash and a minority owner’s inability to direct company policy.

Annuities and Other Interests

The value of annuities, life estates, and remainder interests is determined using actuarial tables published by the IRS. These tables use life expectancy and specified interest rates to calculate the present value of future payment streams.

Promissory Notes

Promissory notes held by the decedent are valued at the outstanding principal plus any accrued interest. A discount from the face value may be justified if the note has a below-market interest rate or if the borrower’s ability to repay is questionable, but the executor must provide evidence to support any discount.

Choosing a Valuation Date

The executor must select the date on which the estate’s assets will be valued. The default is the decedent’s date of death, which provides a fixed point in time for the financial assessment.

However, federal tax law provides an alternative. The executor can elect to use the “Alternate Valuation Date” (AVD), which is six months after the date of death. This option is designed to provide relief if assets decline in value after the decedent’s passing.

The election to use the AVD is only available if it decreases both the total value of the gross estate and the federal estate tax due. This prevents its use simply to gain a higher valuation for beneficiaries. The election is irrevocable and applies to all assets in the estate.

A special rule applies to property sold or distributed during the six-month period before the AVD. That asset is valued as of the date it was disposed of, not the six-month mark, to reflect the actual value realized by the estate.

Reporting Asset Values on the Estate Tax Return

After determining asset values and selecting a valuation date, the information is reported to the IRS on Form 706, the United States Estate Tax Return. This form is the official document for calculating and reporting the estate tax liability.

Form 706 is organized into schedules designated for specific asset types. For example, real estate is reported on Schedule A, stocks and bonds on Schedule B, and miscellaneous property on Schedule F. This format ensures all assets are properly categorized.

Documentation must be attached to Form 706 to support the reported values, such as formal appraisal reports for real estate or closely held businesses. For life insurance, the insurance company provides Form 712 detailing policy values. Financial statements and trust documents may also be required.

The executor is responsible for filing the completed Form 706, which is due within nine months of the decedent’s date of death. A six-month extension can be requested by filing Form 4768. The necessary forms and instructions are available on the IRS website.