The concept of the alternate valuation date (AVD) is a crucial element in estate planning and taxation. It allows the executor of an estate to value the estate as of either the date of death or six months after the date of death. This provision can result in tax advantages depending on the changes in market value of the estate’s assets during the six-month period.
Estate Taxation and Valuation Dates
Definition and Significance
The alternate valuation date is defined as the date exactly six months after the decedent’s death, not precisely 180 days. Under Internal Revenue Code (IRC) Section 2032, this alternate valuation can be elected by the executor if it reduces the gross estate value and the resulting tax liability.
Applying the Alternate Valuation Date
Eligibility and Conditions
To opt for the alternate valuation date, the following conditions must be satisfied:
- The total value of the estate must be lower on the alternate valuation date than it was on the date of death.
- The estate tax due, calculated with the alternate valuation date, must also be lower than it would be using the date of death values.
Procedure and Considerations
When filing the estate’s tax return, also known as Form 706, the executor must make the election to use the alternate valuation date. This election cannot be revoked once made.
The valuation method must be consistently applied to all properties within the estate. It is also significant to note that the alternate valuation date does not affect certain transactions and distributions made within the six-month period after death.
Examples and Illustrative Scenarios
Example 1: Declining Market Value
Suppose an estate comprising predominantly marketable securities valued at $5 million on the date of death but at $4.5 million six months later. Opting for the alternate valuation date can reduce both estate value and taxes due.
Example 2: Rising Real Estate Values
Conversely, if the estate includes real estate properties that appreciate in value, using the date of death valuation might be more beneficial to avoid higher taxes.
Historical Context
The alternate valuation date was introduced in response to the volatility of asset values, notably in periods of economic instability, and to provide equitable tax relief in the computation of estate taxes.
Comparison with Date of Death Valuation
| Date of Death Valuation | Alternate Valuation Date |
|---|---|
| Assesses estate value at the exact moment of death. | Assesses estate value six months post-death. |
| Can result in higher or lower tax, depending on market values at death. | Can reduce estate value and tax if market values decline. |
| Default method. | Requires election by executor. |
Related Terms
- Executor: The legal representative responsible for managing the deceased’s estate and ensuring that all legal and financial matters are settled.
- Estate Tax: A tax levied on the net value of a deceased person’s estate before distribution to the heirs.
- Gross Estate: The total value of all assets and properties before any deductions such as debts and liabilities.
Frequently Asked Questions
Q1: Can the election of the alternate valuation date be applied selectively to certain assets within the estate? No, it must be applied uniformly to all properties within the estate.
Q2: What happens if some assets are sold within the six months after death? Those assets are valued as of the date of sale, not the alternate valuation date.
Q3: Can the alternate valuation date be elected after the estate tax return has been filed? No, the election must be made when the return is filed and is irrevocable once made.
References
- Internal Revenue Code (IRC) Section 2032
- IRS Form 706 Instructions
- Estate Planning and Taxation Textbooks
Summary
The alternate valuation date offers a strategic option for estate executors to potentially reduce the estate’s taxable value and overall tax burden by assessing the estate six months after the decedent’s death. This option must be carefully considered in light of market conditions and the estate’s specific asset composition to determine if it provides a tax advantage.
