|
Investment Planning |
The Alternative Valuation Date and Estate Taxes
An estate is the value of property left by a deceased individual. For example, Bob died on March 15 and left an estate worth $1.1 million.
Since the value of the assets in Bob's estate exceeds the unified credit, the amount below which no taxes are due, his estate will pay taxes, but only on amounts above the unified credit. The unified credit is temporarily eliminated. It is expected that by January 1, 2011, the estate tax will be reinstated with an exemption equivalent of $1 million. All Bob's assets will be valued as of the date he died, March 15. But since Bob held his entire investment portfolio in volatile stocks Bob's assets sank to $600,000 today.
The alternative valuation date allows an estate to pay taxes on the value of assets six months after the date of death. In this case, the assets will be evaluated on September 15, six months after Bob's date of death. If the assets value is lower on the later date, Bob's estate can avoid all estate taxes since his estate would be valued at $600,000.
In order to use the alternative valuation date, three requirements must be met:
- The total value of the gross estate must decrease by using the alternative valuation date.
- The amount of the estate tax must decrease by using the alternative valuation date.
- The person who files the deceased person's estate tax return must make the proper election on the return.
Although you'll avoid some or all of the estate taxes by using the alternative valuation date, this planning method should be used with caution. If the alternative valuation date is chosen, all of the assets will be given the new (lower) value and, consequently, when the assets are sold the lower value will be used to determine any gain or loss.
Using the alternative valuation date on an estate tax return can mean reduced estate taxes. However, you can only make the election to use the alternative valuation date if it reduces the estate tax due.
Let's say that Bob's entire portfolio was composed of Dot.com stock. Dot.com in Bob's portfolio was worth $1.1 million when he died on March 15. On September 15, the value of the stock was worth $600,000. The alternative valuation date was used on Bob's estate tax return. Bob's heirs sold the stock on December 1, when the stock had gone up to $1 million. Bob's heirs would owe income tax on $400,000, the difference between the new cost basis ($600,000) and the sales price ($1 million). Bob's estate would owe no estate taxes, since the value of his estate is less than the exemption amount, $1 million in 2002. When assets increase in value after the alternative valuation date is chosen, capital gain tax may be due.
Tips Disclaimer
These tips contain information that may change over time as a result of new tax legislation. Although we make efforts to keep this information current, you should check with your tax advisor before taking action based upon any information contained in these tips.