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:
Although the alternate valuation date appears to generally be an attractive option in the current economic climate, one must consider the singular drawback that, if the alternate date provides a lower value, then it also results in a lower step up in basis for those inheriting the estate’s interests. Therefore, any gains on assets sold at a later date will be larger than would be the case with a higher step up in basis at the date of death.
It should also be noted that not all states conform to the federal alternate valuation date, but rather require the use of date of death, which could cause the taxpayer to have a different basis for state and federal tax purposes.
Despite the lower step up in basis consideration, the alternate valuation date warrants serious consideration at any time, but particularly in the current economic environment for estates with a date of death within the last year. With no end in sight for the declining markets, tax savings may well be very significant.