When someone dies, it is necessary to value all the decedent’s assets. This valuation is used to determine if a federal estate tax return is due, and the amount of estate tax, if any, which is payable. The valuation is also used to determine the new income tax basis for assets owned by the decedent. This valuation should be used whenever some dies and leaves assets, whether there is a federal estate tax return filed or not, and whether the decedent had assets in joint tenancy, subject to a living trust or covered by his or her will.
The valuation of assets at the death of an individual is determined by provisions of the Internal Revenue Code and regulations. In some areas, it is very precise, while in other areas it is less precise. The valuation procedure is the same whether the decedent died with sufficient assets to require the filing of a federal estate tax return, or the decedent had insufficient assets to require the filing of an estate tax return.
General rule for valuation
If the decedent was a United States citizen or permanent resident of the United States, he or she is taxed on all the assets owned anywhere in the world. The value of the assets is the “fair market value” as of the date of death. This is the price at which an asset would change hands between a willing buyer and willing seller, neither being under compulsion to buy or sell.
The valuation date is the date of death. The federal government allows an alternate valuation date to be used for estate tax purposes, which is six months from the date of death. All assets can be valued at either of those dates, but it is not possible to value some assets at the date of death and some assets later. If the alternate valuation date is used, the value on both the date of death and the alternate date must be obtained and reported.
If the alternate valuation date is used, any assets that have been distributed or sold prior to the six-month period are valued, not at the end of the six-month period, but at the date of distribution or sale. Any assets which change only due to a time factor, have the same value on both dates. A bank account would be valued at the same value on both dates, since there is no change in value of the account, only additional interest from the date of death to the alternate date.
The alternate valuation date can only be used if it lowers the value of the estate for estate tax purposes, and lowers the amount of estate tax due. If there is no estate tax due as of the date of death because the decedent’s total assets were worth less than the estate tax exemption, or if there is a surviving spouse and the estate is exempt from estate tax, then only the date of death value for all assets can be used.
All assets owned at death are subject to taxation. This includes life insurance, securities, real estate, pension and profit sharing funds, IRA accounts, automobiles, furniture, income tax refunds for the year of death, and all other assets. Even assets which are exempt from federal income tax, such as state bonds, are taxable for estate tax purposes.
If the decedent was married at the time of death, only the decedent’s half of any community property is includable along with all the decedent’s separate property. Even though assets may avoid probate, such as assets in joint tenancy registration or subject to a beneficiary designation, they are taxable for estate tax purposes.
If the decedent owned a partial interest in an asset, such as a 25% interest in real property, then only the decedent’s partial interest is valued.
VALUATION OF SPECIFIC TYPES OF ASSETS
Real property is valued by obtaining a written appraisal for the property. If the property is a single-family dwelling, a written appraisal can be obtained from a local real estate broker or agent. This appraisal should be on the agent or broker’s letterhead, describing the property, the value, and how this value was determined.
For unimproved land or lots with a value of approximately $250,000 or less a written appraisal by a real estate broker or agent, as listed above, can be used.
For commercial property, such as an apartment complex, office building, farm, or similar types of property, an appraisal from a reputable appraiser needs to be obtained, and is more detailed than a simple “letter” report from an agent or broker. It may run from a few pages to 10-20 pages.
Any costs of sale such as future brokerage commissions and other costs are not considered in valuing real property.
If a farm or ranch is involved, it is also necessary to value separately the farm equipment, livestock, and growing or harvested crops.
Stocks, bonds, and other securities
Stocks and bonds which are traded on a major stock or bond exchange or over the counter are valued by obtaining the average value between the high and the low for the security as of the date of death. If a stock was selling between $18.50 and $19.50 per share on the date of death, the average, or $19.00 per share would be the value used. The closing price is not used.
If the decedent died on a weekend or holiday when the market was closed, the high and low price for the last trading date prior to the date of death and the next trading date after the date of death are then “re-averaged.”
For mutual funds, the value is the “bid” or public redemption price of that fund on the date of death. If the decedent died on a weekend or holiday the bid or public redemption value of that fund is obtained for the last business day prior to the date of death.
With stocks which are trading “ex-dividend” the amount of this dividend must also be reported, even though this amount is paid in the future. For any bonds, accrued interest on the bond from the date of the last interest payment to the date of death must be reported.
In valuing bonds if there is no high and low for the date of death, the bond is valued by averaging the closing price on the date of death and the closing price on the last trading date prior to the date of death.
United States Treasury notes and bonds are valued the same as other bonds.
United States Treasury bills are valued at their redemption value, without interest, since interest is included in the price.
United States Savings Bonds, Series E, EE, and HH are valued at their redemption value for the month of death. The federal government publishes tables each month showing the redemption value of these bonds depending upon their face amount and month and year of issue. The value as shown on these tables is the same for the entire month. Series G, K, and H savings bonds are valued at their face value at date of death, with no value for interest.
All cash must be listed. If foreign currency is involved, it is valued at the current commercial or retail exchange rate on the date of death, or if the death is a holiday or weekend, it is obtained by averaging the exchange rate for the last business day prior to death and the first business day after death.
Any coins or bills which have a value at greater than their face value, such as silver certificates, are valued at their numismatic value.
Bank and savings and loan accounts
Accounts at banks, credit unions, and savings and loan associations are valued by taking the exact value in the account as of the date of death. Any checks written prior to the date of death but which have not been deducted from the account as of the date of death should be reported separately, so that only the “net” value is listed.
Interest from the date of last payment until the date of death also must be computed and reported separately.
Mortgages and notes
If there were any loans outstanding at the date of death, either secured or unsecured, these are normally listed with the value as of the date of death and accrued interest from the date of last payment until the date of death.
A note may be reported at less than the balance or as uncollectable if satisfactory evidence is submitted to justify the lower value.
Partnerships, corporations, LLCs and business interests
Partnerships (limited and general), shares in a closely held corporation, interest in a limited liability company (LLC) and other business interests must be valued by determining the fair market value of the entity, and then valuing the decedent’s share or interest. Frequently this is discounted. Normally the accountant who handles the business tax returns would be the best person to determine the value.
Some partnership units for very large partnerships are traded on a secondary market and can be valued using the value that the units sell for on the date of death.
Vehicles, boats and airplanes
All vehicles, whether an automobile, RV, motorcycle, mobile home, and all boats and airplanes are valued separately by determining the sales value of the item at the time of death. This can be done by checking various internet publications for automobiles and other items. What a dealer would pay is not considered a proper valuation, but instead you would use what a buyer would pay to purchase the item.
Household furniture and furnishings.
Although the instructions from the Internal Revenue Service require an itemized appraisal of furniture and furnishings, most accountants disregard this and report the furniture and furnishings in a single entry, with a value of approximately $2,000-5,000.
The major exceptions are if the decedent’s will or living trust listed specific items, such as a diamond ring or piano, or if the decedent did have objects of significant value, such as a painting worth $10,000. The federal estate tax return asks if there are any items of artistic or intrinsic value with any item valued at more than $3,000, or any collection of similar items valued at more than $10,000.
The proceeds received from any life insurance policy insuring the decedent’s life must be listed, even if the life insurance was owned by someone other than the decedent and is not taxable. If a federal estate tax return is filed, it is also necessary to obtain a special IRS form (form 712) from the insurance policy for each policy.
If the decedent owned a life insurance policy on some else’s life, this policy must be listed and the cash value of the property as of the date of death must be reported.
Pension, profit-sharing, IRA, 401k, and other retirement accounts
All plan benefits under a retirement plan which the decedent had at death and which are paid after death to anyone are valued, using the rules set forth in IRS regulations. If an IRA account was invested in stocks and bonds, these securities would be individually valued, using the rules for stocks and bonds.
Any other assets are valued at death by attempting to determine their “fair market value.” This would include book royalties, mineral interests, income tax refunds for the year of death, leaseholds, judgments, prepaid rents, taxes, annuities which continue with payments after death; and any other asset.
FILING OF FEDERAL ESTATE TAX RETURN
If the values for all the decedent’s assets as listed above for the decedent’s half of the community property and all the decedent’s separate property exceeds a certain amount, depending upon the year of death, a federal estate tax must be filed within nine months of the date of death (or an additional six-month period if there is an extension is obtained to file the return). This is true even though there may be no tax due because of amounts passing to the surviving spouse, amounts passing to charities, or because of debts and expenses. The amount of exemption before an estate tax return must be filed, depending upon the year of death, is:
If a federal estate tax return is filed, the Internal Revenue Service has up to three years to audit the return. The service frequently checks values for traded securities and if these are incorrect they advise the person who filed the return and, if additional taxes are due, they bill for the taxes plus interest and possible penalties.
INCOME TAX BASIS OF ASSETS
If an estate tax return is filed, the new income tax basis of the assets for whoever inherits is the value shown on the estate tax return. If no estate tax return is required, the value is the date of death value for each asset owned by the decedent, using the rules set forth above.
When a married person dies, and has assets in the decedent’s and spouse’s name as community property, or if the assets are held in a living trust as community property, then both the decedent’s half of each asset and the surviving spouse’s half both gets a new income tax basis at the date of death. John Doe bought 100 shares of XYZ stock for $2,000. He dies years later with the stock valued at $10,000. The stock was held in a living trust as community property. Both his 50 shares and his wife’s 50 shares would each get a new valuation, and the stock would now have an income tax basis of $10,000, with the $8,000 potential capital gain being canceled. If the stock was all the decedent’s separate property, the same would be true.
If the decedent held the stock in joint tenancy with his wife, only the decedent’s half of the joint tenancy gets a new value. In the above example, if the stock were in joint tenancy, then the decedent’s one-half, of 50 shares would get a new value of $5,000, while the wife’s one-half would stay at the original cost of $1,000.
If the decedent is not married at the time of death than all the assets listed on the estate tax return or owned at the date of death if there is no estate tax return get a new value at the date of death, even if the asset is in joint tenancy.
The valuation of assets at the date of death can be complicated and confusing. It is important that the surviving spouse, children, executor, or trustee, whoever is handling matters, gets competent advice from an accountant or attorney to be sure that the values used are correct and those values will be used for trusts, estates and income tax purposes.