What Are the Alternate Valuation Date Rules?
Learn about the alternate valuation date, an executor's choice to reduce estate tax that also changes the cost basis for inherited assets.
When a person passes away, the assets they leave behind, known as their estate, must be valued for tax purposes. This valuation occurs on the date of death, but federal tax law provides an alternative. An executor can choose to value the estate’s assets six months after the date of death. This choice is known as the alternate valuation date election. If the market value of the estate’s assets declines in the six months following the owner’s death, this election can lead to a lower estate tax bill.
Meeting the Eligibility Requirements
To use the alternate valuation date, an estate must satisfy two conditions outlined in Internal Revenue Code Section 2032. First, the value of the gross estate must decrease, meaning the total worth of all assets on the alternate valuation date is less than their total worth on the date of death. Second, the amount of federal estate tax owed must also be lower after applying the alternate values.
The election cannot be made if it does not result in an actual tax savings for the estate. Consider an estate valued at $15 million on the date of death with a hypothetical estate tax of $1.2 million. If, six months later, the assets are worth $14 million and the recalculated tax is $800,000, both conditions are met. The gross estate value and the estate tax liability have decreased, making the estate eligible.
Valuing Assets Under the Alternate Date
Once an estate qualifies for the alternate valuation election, specific rules govern how each asset is valued. Any property still held by the estate six months after the decedent’s death is valued on that six-month anniversary date. If a death occurs on March 31, the valuation date for remaining assets would be September 30. An executor cannot selectively apply the alternate date to some assets and the date-of-death value to others.
A different rule applies to any asset sold, distributed, or otherwise disposed of during the six-month window. These assets are valued on the date of their disposition. For example, if stock is sold three months after the decedent’s death, its value for estate tax purposes is its selling price on that day, not its value at the six-month mark.
Assets Affected by a Mere Lapse of Time
An exception exists for assets whose value changes simply due to the passage of time. These are called assets affected by a “mere lapse of time,” and include patents, annuities, and life estates. The value of these assets declines in a predictable manner not related to market fluctuations.
For these assets, the date-of-death value must be used for the estate tax return, even if the alternate valuation is elected for the rest of the estate. However, an adjustment is made to this date-of-death value to account for any difference in its value at the later date that is not due to the mere lapse of time.
How to Make the Election
The executor makes the election on the U.S. Estate Tax Return, Form 706, by checking a specific box to declare the use of the alternate valuation method. This election must be made on the estate tax return filed by its due date, which is nine months after the date of death, or by an approved extension.
The election can be made on the first estate tax return filed, even if it is late, provided it is filed no more than one year after the original due date. Once the alternate valuation date election is made on a filed return, it is irrevocable. The estate cannot later revert to using the date-of-death values.
Impact on Income Tax Basis of Inherited Assets
The choice to use the alternate valuation date has a direct consequence for the beneficiaries who inherit the estate’s assets. When an individual inherits property, their cost basis in that asset is “stepped up” to its fair market value on the decedent’s date of death under Internal Revenue Code Section 1014. This rule can reduce or eliminate capital gains tax if the beneficiary sells the asset.
Making the alternate valuation election changes this calculation. If the election is made, the beneficiary’s cost basis in an inherited asset is its value on the alternate valuation date, not the date of death. This lower basis means that if the beneficiary later sells the asset, they will realize a larger taxable capital gain.
For instance, imagine a beneficiary inherits stock valued at $200 per share on the date of death. Six months later, its value has dropped to $150, and the executor elects the alternate valuation date. The beneficiary’s cost basis is now $150 per share. If they sell the stock a year later for $220, their taxable capital gain is $70 per share ($220 – $150). Without the election, their basis would have been $200, and the taxable gain would have been only $20 per share ($220 – $200).