What Is the IRC 2032 Alternate Valuation Date?

Internal Revenue Code Section 2032 provides for an “alternate valuation date” for federal estate tax purposes. This provision allows an estate’s executor to revalue assets six months after the owner’s death instead of using the values on the date of death. The purpose is to offer tax relief if the market value of the estate’s assets has declined, as a lower valuation can lead to a smaller estate tax bill.

Eligibility Requirements for the Election

To use the alternate valuation date, an estate must satisfy two conditions. First, the election must decrease the total value of the gross estate. This is an aggregate test, meaning the sum of all assets valued on the alternate date must be less than their total value on the date of death.

The second requirement is that the election must also reduce the amount of federal estate tax and any generation-skipping transfer (GST) tax the estate owes. Both of these conditions must be met. An estate cannot make the election simply because its assets have lost value if that loss does not translate into an actual tax savings.

Consider an estate whose assets drop in value during the six-month period, satisfying the first condition. However, due to significant deductions, such as the marital deduction for assets passing to a surviving spouse, or applicable tax credits, the estate may already have a zero federal estate tax liability. In this scenario, even though the gross estate’s value is lower, the election does not decrease the tax owed, making the estate ineligible to use the alternate valuation date.

This dual requirement prevents the election from being used to achieve a lower asset value for other purposes, such as providing beneficiaries with a lower cost basis for future capital gains calculations. The executor must perform calculations for both dates to confirm that making the election reduces both the gross estate and the ultimate tax liability.

Determining the Alternate Valuation Date

The general rule for alternate valuation applies to any property that the estate still holds six months after the decedent’s death. For these assets, the alternate valuation date is six months following the date of death. If the sixth month does not have a corresponding day, the last day of that month is used.

A different rule applies to any estate asset that is sold, exchanged, distributed to a beneficiary, or otherwise disposed of within that six-month window. For such assets, the valuation date is the actual date of the transaction. For instance, if an estate sells stock three months after death, that stock is valued on the day of the sale. If real estate is deeded to an heir four months after death, its value is its appraised value on that date.

A special provision addresses assets whose value changes merely due to the passage of time, such as patents, annuities, and life estates. Under the tax code, these specific assets must be valued as of the date of death. An adjustment is then made for any difference in value that is not attributable to the simple lapse of time, such as a change in market interest rates affecting an annuity’s value.

Making the Election

The process for an executor to select the alternate valuation date is done directly on the federal estate tax return. The election is formally made by checking the designated box on Part 3, “Elections by the Executor,” of Form 706, the U.S. Estate (and Generation-Skipping Transfer) Tax Return. This action notifies the IRS of the estate’s choice.

This election is irrevocable; once made, it cannot be changed. The decision applies to all assets within the gross estate. An executor cannot selectively apply the alternate valuation to some assets while using the date-of-death value for others. The choice is all-or-nothing for the entire estate.

The deadline for making the election is tied to the filing of the estate tax return. It must be made on a return that is filed by its due date, which is typically nine months after the date of death, or by the extended due date if a filing extension was granted. There is a relief provision that allows the election to be made on a late-filed return, but only if that return is filed no more than one year after the original due date, including any extensions.

Tax Implications of the Election

The most direct consequence of a successful alternate valuation election is a reduction in the estate’s federal tax liability. By reporting a lower gross estate value, the taxable estate is smaller, which lowers the amount of estate tax due. This preserves more of the estate’s assets for distribution to its beneficiaries.

However, this decision has a secondary effect on the beneficiaries concerning their cost basis in the inherited property. The value of an asset reported on the estate tax return becomes that asset’s cost basis for the beneficiary. If the alternate valuation is used, the lower value becomes the beneficiary’s new basis, a concept often called a “step-down” in basis.

This lower basis has direct and potentially costly implications for the beneficiary’s future income taxes. When the beneficiary eventually sells the inherited asset, the capital gain is calculated as the difference between the sale price and their cost basis. A lower basis resulting from the alternate valuation election will lead to a larger taxable capital gain upon sale.

For example, assume a beneficiary inherits stock valued at $100,000 on the date of death. Six months later, its value drops to $80,000, and the executor elects alternate valuation. The beneficiary’s cost basis is now $80,000. If they later sell the stock for $110,000, their taxable capital gain is $30,000 ($110,000 – $80,000).

Had the election not been made, their basis would have been $100,000, and the taxable gain would have been only $10,000 ($110,000 – $100,000). The executor must weigh the immediate estate tax savings against the potential for increased income tax for the beneficiaries down the road.