Alternate Valuation Date

Summary:

When you die the estate tax is assessed on the value
of the assets you owned on the date of your death. In case you haven’t noticed,
asset values have been declining lately. If your estate were taxed on the date
of death values, nine months later when the tax is paid, the value of the
estate might have declined to the point where the tax is as much as the value
of your assets. To minimize this unfairness the tax laws permit your estate to
value assets at the date six months after your death if the values and tax are
lower. This is called the alternate valuation date and is contained in Code Section
2032.

√ Gee another tax rule. Do
you care? Well, if you’re an executor and don’t make the election and should
have, you could be held personally liable if the alternate valuation could
lower taxes. Re Lohm Est., 269 A.2d 451 (Pa. 1970).  Got your attention?

√ The election is made by
the executor on the estate tax return and is irrevocable.

√ The election must apply
to all estate assets, no partial application is permitted. Treas. Reg. Sec.
20.2032-1(b)(2).

√ Assets which are distributed, sold, exchanged, or
otherwise disposed of, before the 6 month date after death are valued as of the
date they were distributed, sold, exchanged, or otherwise disposed of. A
transaction which is a mere change in form is not considered sold, exchanged,
etc. and is valued at the 6 month date. Treas. Reg. Sec. 20.2032-1(c).

√ Patents, life estates,
remainders and reversions that are affected by a mere lapse in time are valued
as of the date of death and an adjustment to the 6 month alternate valuation
date to reflect differences in value that is not due to the mere lapse of time.
Treas. Reg. Sec. 20.2032-1(f).

√ If the alternate
valuation approach is used, the value of an asset on the alternate valuation
date becomes the beneficiary’s income tax basis for that asset. IRC Sec.
1014(a)(2). Thus, the estate tax savings from electing alternate valuation may
be offset by an increased income tax liability when the inherited property is
later disposed of. You’ll have even more fun and family harmony if the result
of the election is to lower taxes for one heir while raising the overall tax
costs for another.  Rumor is that
the Hatfield-McCoy feud began over a 2032 election.

√ Some estates have
restructured assets after death to reduce their value, then elected to use the
alternate valuation date to lower their estate tax. The IRS viewed that like
taking your finger off a checker piece then trying to move it anyhow – not
playing by the rules. So they wrote new rules in Proposed Regulations Section
20.2032-1(f)(1).  These endeavor to
prevent executors from taking actions that could lower the value of an estate
asset and then electing alternate valuation. Specifically, the IRS tries to
limit reductions in value to only those caused by market forces.

√ Choosing alternate
valuation can affect the estate’s qualification for special estate tax benefits
that are based on certain assets exceeding specified percentage tests. If the
relative value of different assets changes post-death these benchmarks could be
met or missed.  These could
include: Code Section 303 redemption of stock to pay death taxes if the value
of the corporate stock exceeds 35% of the gross estate; Code Section 2032A
requires that 25% or more of the adjusted value of the gross estate must
constitute qualifying real property interests; or  Code Section 6166 requires that business interests exceed 35
percent of the adjusted gross estate to pay the estate tax in installments.

√ The retitling of the
decedent’s IRA (“John Doe”) to an inherited IRA (“John Doe, Deceased, fbo Jane
Doe”) should not be considered a 2032 distribution so that the IRA will be
valued at the six month date (assuming no sales of stock from the IRA).

√ If prior to the September 30 of the year
after death (the beneficiary determination date) the year of death, the
beneficiaries who inherit the IRA can split the IRA account into separate IRAs
so that each of them can be a “designated beneficiary” of their own separate
IRA and thus use their own life expectancy to calculate required minimum
distributions (e.g. cousins with significant differences in age).  The division of one IRA among named
beneficiaries should not be a “disposition” so that the value should still be
determined at the 6 month date.