A little-noticed tax provision that’s been on the books for almost 80 years may come in handy now due to the recent volatility in the stock market. It could save hundreds of thousands of estate tax dollars if you’re the executor of a recently deceased relative’s estate. Similarly, you might incorporate this provision into your own estate plan.
Strategy: Elect the “alternate valuation date” for federal estate-tax purposes. This special election enables you to reduce the size of a decedent’s taxable estate—after he or she has died.
What’s more, you might be able to lower the estate tax bill by holding or distributing certain assets.
Here’s the whole story: Normally, the value of assets included in an estate is based on their value on the decedent’s date of death. But, as the executor, you can elect to use an alternate valuation date of six months after the date of death. For instance, if the decedent owned equities that have declined in value since the date of death, you can reduce the estate tax your family will have to pay or even eliminate it altogether.
The alternate valuation break dates back to the Great Depression, but it has particular relevance today.
Example: Your favorite uncle, a widower, passed away on July 15, 2008. His estate was composed mainly of stocks and real estate. The estate’s value was $3 million on July 15, 2008, the date of death, but it’s worth only $1.9 million on Jan. 15. The federal estate-tax exemption for decedents dying in 2008 is $2 million ($3.5 million for 2009).
If you’re the executor and you use the date of death to value your uncle’s assets for estate-tax purposes, only $2 million is sheltered from the federal estate tax. The tax on the remaining $1 million is $450,000. However, if you choose the alternate valuation date instead, the entire $1.9 million can be distributed free of federal estate tax. In other words, the family saves $450,000 in estate tax!
Caution: This is generally an all-or-nothing deal. You can’t pick and choose which assets are valued on the alternate valuation date. So, some of the assets in the estate—for example, certain family heirlooms—might have a higher estate tax value.
Also, note that any assets distributed or otherwise disposed of before the alternate valuation date must be valued on the date of distribution or disposition. Thus, you might hold onto property you believe will continue to decline in value. Conversely, distribute those assets you’re convinced are poised for a rebound.
Tip: The alternate valuation election is available only if it decreases the gross estate and the resulting estate tax bill. It can’t be used, regardless of the estate’s size, if all assets pass to a surviving spouse under the marital deduction or if the estate tax is zero.
- Small Business Tax Deduction Strategies No matches