Understanding How Alternative Valuation Dates Can Save Money (Jacob Katz)

If you or an advisor must file a Form 706 with the IRS to report estate or generation-skipping tax, understanding the IRS’ allowance for use of an Alternative Valuation date may be critical during a declining stock market or a recessionary period. Generally,
those estates filing a Form 706 must do so within nine months of the death of the estate owner, referred to as the decedent. Like many tax filings, the deadline can be extended by six months, although the estimated tax is due on time.

However, regulations allow filers to elect an alternative valuation date six months after death (it is important to note that any property distributed, sold, or exchanged during those six months must be valued as of the date of such disposition). This is
an important option since, in the face of a declining market, the value of stocks or other assets that drop precipitously soon after the decedent’s death could result in estate tax owed on value that no longer exists.

Alternative Valuation Date Eligibility

Typically, assets owned by the deceased are included in his or her taxable estate, based on their value on the date of death. For instance, if an individual owned stocks valued at $10 million on the day when he or she died, the stocks would be included in
the estate at a value of $10 million.

Despite favorable rules that allow a federal gift and estate tax exemption of $12.96 million (in 2023), some families still must contend with the federal estate tax. Utilizing an alternative valuation date election could effectively lower a federal estate
tax bill, potentially substantially.

All Assets Fall Under Alternate Valuation Date

The alternate valuation date election can save estate tax, but there is one potential drawback: The election must be made for the entire estate. In other words, the filer cannot choose which assets (and liabilities) are measured on each date but must instead
elect a date for all assets. Due to this requirement, for estates that hold closely-held businesses or real estate entities, it is important for a qualified valuation specialist to review the assets to assist in determining which date makes the most sense.
Afterall, it is possible for the stock market to decline while business assets appreciate, removing the applicability of the alternative date.

Likewise, even if a stock portfolio remains stable, savings may be incurred on business assets that decline during those six months, something that is not uncommon in a rising interest rate environment.

Start Planning for Your Estate

Our estate planning specialists have assisted numerous clients in reducing estate tax liability and preserving wealth for future generations.

It’s never too early to start planning for your estate, and the favorable estate planning tools available today may not be available in the future. We recommend discussing with your estate planning advisor to determine if the alternate valuation date or
other estate planning strategies fit your personal situation.