The fair market value (what a buyer is willing to pay a seller) of an estate’s assets is the value at which those assets are included in the gross estate for tax purposes. This amount is determined on one of two dates: the date of death or the alternate valuation date. The alternative valuation date is six months after the date of death.
Date of Death Valuation
As the name indicates, the date of death valuation for an estate is based on the fair market value on the date the decedent’s actual date of death.
- For investment, retirement, and bank accounts, the statement values are based on the date of death.
- With stocks that are publicly traded outside of a brokerage account, the value is determined by taking the high and low price of the stock on the date of death. If the date of death occurs on a day the market is closed, the average is taken from the trading days before and after the date of death.
- An appraisal is used to determine the fair market value of personal effects, business interests, and real estate from the date of death.
Alternate Valuation Date
When using an alternate valuation date, the fair market value of all estate assets is determined six months after the date of death. A personal representative for an estate is allowed to choose whether to use the date of death values or the alternate valuation date to determine the gross estate value. Only estates that have a determined gross value of more than $5.45 million are subject to taxes on their estate.
Which Valuation Type to Use
Depending on how much value is lost (or gained) in the 6 months after death, a personal representative would choose the type of valuation that would show the greatest loss in order to pay fewer taxes on the estate. However, if the alternative valuation date values are used, then all of the assets need to be revalued.
Sometimes it is better to use the higher assessed value if there are funds in the estate to pay the taxes for the heirs. For example, if a husband dies and his wife is left with an investment property and she sells the property later, it would be better for her to choose to have the property initially valued at a higher rate if she has to pay capital gains taxes. The capital gains tax paid is the difference in the valuation of the property at the time of purchase or inheritance and what the value of the property at the time of the sale.
Determining Fair Market Value
For different types of assets, the asset valuation is computed differently for different types of estate assets.
- Real Estate – The fair market value of the applicable valuation date is used.
- Listed Securities – Stocks and bonds valuation is based on the arithmetical mean between the highest and lowest selling price on the applicable valuation date.
- Close Corporation Stock – If certain conditions are met, the value is based on an analysis of factors such as nature and history of the business, economic outlook, good will, recent sales of the stock, and market price of a stock in similar corporations. A professional appraisal is needed.
- Mutual Fund Shares – This asset is valued at the price the fund would pay the shareholder or the “bid” price on the applicable valuation date.
- Proprietorships and Partnerships – Based on an appraisal of the business assets that are both tangible and intangible and the demonstrated earning capacity of the business, a fair market value is determined. The purchase price of the portion of the business is used for the value for estate tax purposes.
- Notes – If a lower value cannot be demonstrated, then the value is assessed as being equal to the unpaid principal plus any accrued interest.
- Valuables – Art, jewelry, and antiques are based at fair market value and generally require an expert appraisal.
- Survivor Annuity – A comparable single life annuity that is equal to the survivor annuity is used to determine value based on the applicable valuation date.
- Life Insurance Proceeds on Decedent – Any proceeds received by a beneficiary or an estate are valued at the amount of the proceeds.
- Life Insurance Proceeds Owned by Decedent on Another’s Life – Valuation is based on the amount a comparable contract could be purchased for at the time of the decedent’s death.
- Joint Tenancy Property for Spouses – Half of the value of a joint tenancy property is to be included in the estate of the first spouse that passes.
- Joint Tenancy Property for Non-Spouses – The entire value of the joint tenancy property minus the purchase price or consideration given by the survivor is included in the estate of the first joint tenant to pass.
As with all estate assets, an expert valuation should be conducted. Under certain conditions, the value may be adjusted or excluded from the estate’s gross value.
Other considerations for an estate to discuss with an attorney include health care directives such as a living will and a durable power of attorney. A living will is a legal document that allows an adult to give directives in advance of a medical emergency whether or not to perform life-sustaining medical procedures to prolong life when a reasonable recovery is not likely. A power of attorney is another legal document that assigns one person to act on the principal’s behalf. Since this process is extremely complicated, a financial advisor or attorney that specializes in estate planning is recommended.