When to Elect Alternate Valuation for Estate Tax

An executor must value a decedent’s assets to determine if federal estate tax is owed, with valuation normally based on the fair market value on the date of death. However, Internal Revenue Code Section 2032 offers an option called alternate valuation. This allows the executor to re-value property at a later date if asset values have decreased. The purpose is to use these lower values to reduce the estate’s federal tax liability, which can be a strategic response to market fluctuations after the decedent’s death.

Requirements for Electing Alternate Valuation

An executor cannot choose to use alternate valuation simply because asset values have dropped. The Internal Revenue Code establishes two specific tests that must both be met for the election to be valid. These rules ensure the election is used for its intended purpose of reducing federal estate taxes, not for other tax planning objectives. Failure to meet both conditions will render the election invalid.

The first requirement is that the total value of the decedent’s gross estate must be lower on the alternate valuation date than it was on the date of death. The second requirement is that the sum of the federal estate tax and any generation-skipping transfer (GST) tax imposed on the estate must also decrease as a result of using the alternate values.

These two tests prevent the election from being used in situations where no estate tax is due, as an estate must have a potential federal tax liability. For 2025, the federal estate tax exemption is $13.99 million per individual, meaning only estates valued above this amount would owe federal estate tax. Under current law, this high exemption amount is scheduled to be reduced by about half at the end of 2025.

For example, consider an estate valued at $10 million on the date of death. Since this is below the $13.99 million exemption, no federal estate tax is owed. If the assets decline to $9 million six months later, the gross estate value has decreased, meeting the first test. However, because the tax liability was zero and remains zero, the second test is failed, and the estate is ineligible to elect alternate valuation.

Determining the Alternate Value of Estate Assets

Once an estate is eligible for alternate valuation, the executor must calculate the value of each asset according to IRS rules. The valuation date for a particular asset depends on what the estate did with it during the six-month period following the decedent’s death.

For any property that the estate has not sold, distributed, or otherwise disposed of within six months, the valuation date is exactly six months after the decedent’s death. For instance, if a stock portfolio remains in the estate’s brokerage account for the entire six-month period, it would be valued based on its market price on that six-month anniversary.

A different rule applies to any asset that is sold, distributed, or otherwise disposed of by the estate within that six-month window. In these cases, the asset is valued as of the date of its disposition. For example, if an estate sells a house four months after death for $475,000, its alternate value is $475,000. If the election is made, it must apply to all assets in the gross estate.

Certain assets whose value is affected by the “mere lapse of time,” are treated differently. These include items like patents, annuities, or life estates. For these specific assets, the value must be taken from the date of death, with an adjustment made for any difference in value that is not due to the time lapse.

How to Make the Formal Election

Making the alternate valuation election is a formal process that must be done correctly to be considered valid by the IRS. The decision is communicated by the executor on the federal estate tax return, Form 706.

The executor must check the box on Part 3, Line 1 of the form, explicitly indicating the choice to use alternate valuation. Simply filing a return with asset values from the alternate date is not sufficient; the box must be checked for the election to be properly made.

The election must be made on the estate tax return, which can be filed on time or late, provided it is filed no more than one year after the original due date, including extensions. This one-year grace period provides some flexibility, but it is a firm deadline. Once the election is made on a filed return, it is irrevocable.

Effect on Asset Basis for Beneficiaries

The decision to elect alternate valuation extends beyond the estate’s tax liability and has a direct impact on the beneficiaries who inherit the property. This effect centers on the tax concept of “basis,” which is the value of an asset used to determine gain or loss for income tax purposes when the asset is later sold.

When a person inherits property, their basis in that asset is its fair market value on the decedent’s date of death. This is known as a “stepped-up basis” because the basis is adjusted up to the current market value, erasing any unrealized capital gain that accrued during the decedent’s lifetime. This rule allows a beneficiary to sell an inherited asset shortly after death and owe little to no capital gains tax.

When an executor elects alternate valuation, this changes the basis for the beneficiaries. Instead of the date-of-death value, the heir’s basis in the property becomes its value on the alternate valuation date. This means that beneficiaries will receive the assets with a lower tax basis than they would have otherwise.

This lower basis creates a larger potential capital gain for the beneficiary upon a future sale of the asset. For example, assume a beneficiary inherits stock valued at $100 per share on the date of death. If alternate valuation is elected and the value drops to $80 per share, the beneficiary’s basis is $80. If they later sell the stock for $110, their taxable capital gain is $30 per share. Without the election, their basis would have been $100, and the taxable gain would have been only $10 per share.