Consider the Alternate Valuation Date
As of December 3, 2008, the major stock indexes were down on the order of 40% for the year. In addition, the long-suspected recession has been officially declared. While the depth and length of the current recession is laden with uncertainty, what is certain is that virtually no investment sector has remained unscathed. For those dealing with an estate tax issue from within the last year, consideration of the alternate valuation date is almost certain to provide vital information for the estate tax filing process.
As part of the Economic Growth and Tax Relief Reconciliation Act of 2001, Section 2032 of the IRS Tax Code was designed to provide some measure of relief to those taxpayers negatively affected by fluctuating markets. The alternate valuation date provides taxpayers the option to choose to use a date six months subsequent to the date of death to value an estate. In order to choose this option, the following conditions and processes must apply:
- The total value of the gross estate must be lower on the alternate date than on the date of death. The value on an alternate date must include the entire estate and cannot be applied to selected assets owned by an estate. An exception to this rule applies to any assets sold between the date of death and the alternate valuation date. Such assets are valued as of the date of disposal. This rule also makes it clear that two values must be known for the taxpayer to make an informed decision: the value at the date of death, as well as the value six months after the date of death.
- The amount of estate tax must be lower using the alternate date than on the date of death.
While this second rule would seem to always be the case if the first rule holds true, this is not the case for estates passing under the marital exclusion rule, or in other cases where the estate tax might be zero as of the date of death. If there is no estate tax to begin with, there cannot be a reduction in estate tax. However, should a surviving spouse decline certain assets, thereby triggering estate tax, this rule still applies. The estate tax used to calculate whether there is a decline in taxes, includes both estate and generation skipping tax. - Any assets that decline in value simply due to the passage of time must still be valued as of the date of death. The IRS has proposed a change to the regulation clarifying that only declines in asset value due to market conditions may be considered as of the alternate valuation date.
The clarification states that declines in an asset's value due to an action of the decedent or estate, may not be considered as of the alternate valuation date.