Estate tax alternate valuation

For estate tax purposes, assets are generally valued on the estate tax return as of the decedent’s date of death. However, if the executor elects to use alternate valuation, the assets are generally valued as of six months after date of death. Alternate valuation cannot be applied to only a part of the property. Exceptions to this rule are noted below.

Alternate valuation is useful if the assets of the estate decrease in value during the six months after death. The use of alternate valuation is governed by IRC §2032.

What are the requirements to make the election?

All the following requirements must be met to elect alternate valuation:

The use of alternate valuation must reduce the gross estate value.
The use of alternate valuation must reduce the total net estate taxes due after application of all allowable statutory deductions.
The alternate valuation may be elected on Washington filings when a federal return is not filed.
- However, when filing a federal estate return, the alternate valuation election must be the same for both returns. If the election cannot be made on one return, it is not allowed on either return.
The election is made on the first timely return.
- If the return is late, the election may be made on the return filed within 1 year from the due date (including granted extensions).
- If the election is not made on the original return, it can only be made on a subsequent return if it is filed by the due date of the original return (including granted extensions).
Once made, the election may not be revoked.

How do I make the election?

Under the Elections by Executor section of the return, there is a question that asks, “Do you elect alternate valuation?”. To elect alternate valuation, answer this question “yes”.

If the alternate valuation is elected, the values of the assets on both the date of death and the alternate valuation date must be reported on the return’s schedules. The totals filled out for the tax calculation will be based on the alternate valuations.

Two sets of supporting documents must be included with the return supporting both date of death and alternate valuation values.

What is the alternate valuation date?

If you elect alternate valuation, the assets are generally valued as of six months after the date of death. However, if an asset is sold, exchanged, distributed to a beneficiary, or otherwise disposed of within six months of death, it is valued as of the date it is disposed of.

If there is no corresponding day in the sixth month after death, then the alternate valuation date is the last day of the sixth month. For example, if the decedent dies on March 31, the alternate valuation date is September 30.

Distributions, sales, exchanges, and other dispositions of the property within the six-month period after the decedent’s death must be supported by evidence. If the court issued an order of distribution during that period, you must submit a certified copy of the order as part of the evidence. The Department of Revenue may require you to submit additional evidence if necessary.

How do I determine the alternate value?

Any property distributed, sold, exchanged, or otherwise disposed of, separated, or passed from the gross estate by any method within six months after the decedent’s death, is valued on the date of distribution, sale, exchange, or other disposition, whichever occurs first. Value this property on the date it ceases to form a part of the gross estate, (i.e., on the date the title passes as the result of its sale, exchange, or other disposition).

Any property not distributed, sold, exchanged, or otherwise disposed of within the six-month period is valued on the date six months after the date of the decedent’s death.

Changes in value that are due to the mere lapse of time are not considered for purposes of alternate valuation. Examples of assets that change in value because of the lapse of time are life estates, remainder interests, interests for a term of years, and patents. In the case of life estates, remainders, and similar interests, the ages of the individuals involved are measured as of the date of death and the underlying property is valued as of the alternate valuation date.

Any property, interest, or estate that is “affected by mere lapse of time” is valued as of the date of decedent’s death or on the date of its distribution, sale, exchange, or other disposition, whichever occurs first. However, you may change the date of death value to account for any change in value that is not due to a “mere lapse of time” on the date of its distribution, sale, exchange, or other disposition.

Here are some examples of how property existing at the date of death and property earned or accrued after death would be valued:

Interest. Interest accrued to the date of the decedent’s death on bonds, notes, and other interest-bearing obligations is property of the gross estate on the date of death and is included as part of the alternate valuation. The value is the same for both alternate valuation and date of death value. This is an example of “affected by mere lapse of time”.
Rent. Rent accrued to the date of the decedent’s death on leased real or personal property is property of the gross estate on the date of death and is included in the alternate valuation at the same value.
Dividends. Outstanding dividends that were declared to stockholders of record on or before the date of the decedent’s death are considered property of the gross estate on the date of death and are included in the alternate valuation at the same value. Ordinary dividends declared to stockholders of record after the date of the decedent’s death are not property of the gross estate on the date of death and are not included in the gross estate for alternate valuation.
Savings bonds and zero-coupon bonds. The discount is treated as interest.
Life insurance policy on the life of another person. Increases in the value of the policy attributed to the payment of premiums or interest earned during the six months after the decedent’s death are not included. However, if the insured dies in the interim, the entire proceeds are includable in the policy owner's estate if alternate valuation is elected.

How does the alternate valuation election effect the marital, charitable, and other deductions?