Option to Lower Estate Tax on Declining Assets
The federal estate tax may be wiped out, but that won’t help families who owe the tax for 2016. In fact, they face an unpleasant tax surprise if the value of assets declines.
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Strategy: An executor may consider choosing the “alternate valuation date.” Instead of using the date of death to value assets, the estate tax is based a valuation date of six months after death. This strategy is advisable when assets in the estate—for example, securities or real estate—have declined in value after the decedent died. If you’re the executor of the estate of a recently deceased family member, you might wait until the six-month deadline to see which way the wind is blowing. Depending on the trend, the estate tax savings can be substantial. The election must be made within one year of death—no exceptions allowed.
Example: Your widowed mother died on Dec. 1, 2016, with a remaining federal estate tax exemption of $3 million. (The maximum exemption for 2016 was $5.45 million.) You’re the executor and, along with your siblings, one of the beneficiaries. For simplicity, say the entire estate consisted of securities valued at $4 million on Dec. 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 securities plummet in value and are worth only $2.5 million on May 1, 2017. By electing the alternate valuation date, you can wipe out the entire estate tax liability. For income tax purposes, the assets will be stepped up in value to their value on May 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 specified assets.