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Lower taxable value of estate assets

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The federal estate tax isn’t dead yet. Despite a generous estate tax exemption ($5.43 million for individuals who die in 2015), the tax may still hit estates of wealthy individuals, especially if the exemption has been eroded by previous lifetime gifts. But there’s one thing an estate executor might do to reduce the estate tax bite.

Strategy: When suitable, choose the alternate valuation date. Instead of using the date of death to value assets, the estate uses a valuation date of six months after death.

This strategy only makes sense if certain assets in the estate—for example, securities or real estate—have declined in value since the decedent died. If you’re the executor of the estate of a recently deceased family member, you may want to wait at least six months to see which way the wind is blowing. Depending on the trend, the estate tax savings can be substantial.

An alternate date valuation election is available only if it will lower both:

  • The value of the gross estate and
  • The sum of the estate tax and generation-skipping tax (GST) after applying all allowable credits against these taxes.

Also, you must make the election within one year of death—no exceptions allowed.

Example: Your rich uncle died on Jan. 1 with a remaining estate-tax exemption of $3 million. You’re the executor and, along with your siblings, one of the beneficiaries.

For simplicity, let’s say the entire estate consisted of securities and real estate valued at $4 million on Jan. 1. If you use the usual date of death for valuation purposes, the family will owe $400,000 in federal estate tax (40% of $1 million).

But suppose that the assets have declined in value and are worth only $2.95 million on July 1. By electing the alternate valuation date, you can wipe out the entire federal estate-tax liability. For income tax purposes, the tax basis of the inherited assets will equal their value on July 1.

If the heirs sell any of the assets within the six-month period, the valuation date for those assets is the date of the disposition. Therefore, it may be wise not to distribute assets until it’s clear what valuation date you’ll be selecting.

Tip: This is an all-or-nothing proposition. You can’t select alternate valuation only for specific assets.

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