Many families and companies are feeling the financial crunch right now. With high volatility in the stock market, and no end date for COVID-19 Stay-at-Home in sight, experts cannot predict what the long-term economic implications will be on the value of your real estate, business, and other assets.

We want our clients to know there are options and we will be posting a series of articles on our website in the coming weeks to discuss those options.

Utilizing the Alternate Valuation Option

When a loved one passes, the Executor of that estate must file a tax return for the estate within nine months of death.  An automatic extension of six months is available for those who need it (for a total of 15 months). The appraisals of the assets included in that return are typically valued as of the date of death of the decedent. However, under 26 US Code § 2032 Alternate Valuation, the Internal Revenue Service (IRS) gives the Executor of an estate the option of utilizing an Alternate Valuation Date six months after the date of death. Estates with a total value in excess of the Federal Estate Tax exemption are subject to estate tax at a rate of 40%, so during unpredictable economic times such as we are now experiencing, utilizing the Alternate Valuation Date can significantly reduce an estate’s tax burden.

In order to use this tool, an estate must be subject to estate tax, meaning it must be valued at more than $11.4 million in 2019 and $11.58 million in 2020, per individual. In addition, the use of the Alternate Valuation Date must reduce the value of the estate as well as reduce the sum of the federal estate tax and generation-skipping tax (GST) levied. GST imposes a tax on outright gifts and transfers in trust to or for the benefit of unrelated persons who are more than 37.5 years younger than the donor or to related persons more than one generation younger than the donor, such as grandchildren.

Should an Executor elect to utilize an Alternate Valuation Date, ALL property included in the gross estate must be valued as of six months after the date of death. In the case of property that was sold, transferred, or disposed of within the six months after death, that property is valued as of the date of sale or disposal.

The election for an Alternate Valuation Date appraisal must be made at the time of the initial filing of the estate tax return and is considered irrevocable. Keep in mind, if the initial estate tax return is filed more than one year from the time prescribed by law, including extensions, the ability to elect an Alternate Valuation Date is lost.

Essentially, the Alternate Valuation method gives estate tax return filers the option to value the assets as of the date of death and six months later, and select the valuation date that results in a more advantageous tax position.  The automatic six-month extension for filing the estate return will provide more than sufficient time to properly value the assets as of both dates, and the Executor can then elect the most beneficial option.

As with any financial decision, there are pros and cons to utilizing an Alternate Valuation Date. While the estate’s tax burden can be decreased, it may have unforeseen consequences, such as increasing the amount of other taxes owed when property is sold. It is important to talk to your financial advisor to determine if this election would benefit in your situation.

These are challenging times. Sobel EAC Valuations wants our clients to know we are here to answer questions and alleviate your concerns. Wishing you all good health.