For estate tax purposes, the value of one’s gross estate is usually determined on the date of death. However, instead of valuing the gross estate at the date of death, the executor may choose to value the gross estate at an alternative date. This date is six months after the date of death of the decedent if the property is not otherwise sold, distributed, or disposed of within those six months.
If the property is in fact sold, distributed, or disposed of during those six months, then the value is determined at the date of the sale, distribution, or disposition.
By using the alternative valuation method, you may be able to reduce the amount of estate taxes if the gross estate depreciates during the six months after the decedent’s death. The downside is that the recipient will receive the property on a "stepped-up basis"—meaning the value of the property they receive could be lower than the valuation at time of death. This could result in a substantial income tax hit should the recipient sell the property for a gain down the road.
The executor can only elect to use the alternative valuation method if it will lower both:
- The value of the gross estate; and
- The sum of the estate tax and generation-skipping tax after applying all allowable credits against these taxes.
Estates that do not owe any federal estate taxes or generation-skipping tax may not use the alternative valuation method.
This election must be made within 1 year after the due date of the federal estate tax return (including extensions). There is no exception to this 1-year rule.
If you are considering drafting a will to dispose of your assets upon passing, it would be ideal to consult with an attorney experienced in estate planning. An estate lawyer can present you with a number of options for settling your estate and ensure that you limit your estate tax liability.