The value of an estate is important for tax purposes. There are two estate valuation approaches allowed by the federal government. Below is a look at why it may be better to select one over the other.

Calculating Values

Fair market value is used for estate asset valuation. For assets such as bank accounts, it’s easy enough to obtain an exact figure on a certain date by checking the statements. Some assets, such as stocks and bonds, can fluctuate in value multiple times on a given date. In these cases, a daily average is used. Other assets, such as real estate and physical property, require an appraisal based on comparable sales.

2 Estate Valuation Approaches

The two estate valuation approaches allowed by the Federal Government are date of death or alternative valuation date. The first is self explanatory. The alternative valuation date is exactly 6 months from the date of death.

Which Valuation Approach Is Best

The best approach depends on whether assets increased or decreased in value from the date of death to the alternative date. In most cases, the goal is to minimize estate taxes, so selecting the date where assets are valued the least would be best. However, there is another factor to consider,…future capital gains.

When heirs go to sell assets that are inherited from an estate, the profit on that sale is taxable as capital gains. Going with the lowest valuation for estate tax purposes may lead to higher capital gains taxes in the future. Here’s an example.

Let’s assume that a real estate asset is valued as:
Date of Death: $400,000
Alternative Valuation Date: $430,000

If you opt for the date of death valuation given the lower value, that value will be used to calculate profit on a future sale. Let’s assume that down the road, you sell that home for $500,000. This results in capital gains of $100,000 (instead of $70,000 using the alternative method). Depending on your income level, capital gains can be 0%, 15%, or 20%. Assuming you fall in the middle and must pay 15%, you would pay $15,000 in capital gains taxes instead of $10,500. Selecting the date of death, in this case, would cost you $4,500 more than if you have selected the alternative method. State capital gains taxes would also apply.

This example is based on just one asset. An estate is likely to have many assets, with some valued higher and others lower on a given date. Thus, selecting between the two estate valuation approaches can be quite complex. Considering seeking the help of an estate planning attorney, financial advisor and CPA to run numbers for different scenarios so that you can make an educated decision.

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