Estate valuation is the process of calculating an estate’s value for federal and state estate tax purposes. It’s a major component in determining whether an estate is liable for the tax, and it can be a valuable tool in estate planning as well.
You can take steps during your lifetime to avoid estate tax, or you can take steps to reduce any tax liability if it appears likely that your estate may be liable for taxes.
Net Estate vs. Gross Estate Values
The term “gross estate” refers to the value of assets and properties before taxes and debts are subtracted. The estate tax is based on the net value of an estate—the amount remaining after subtracting all available deductions, credits, and payment of liabilities.
Liabilities
Estate liabilities are debts owed by the decedent, such as credit card balances and mortgages. The costs incurred in processing an estate are also deductible, as are state-level estate taxes when you’re calculating taxes at the federal level. Gifts made to charities and the value of assets transferred to a spouse can also be deducted.
Assets
Assets in an estate can include properties that are wholly owned by the decedent, as well as those in which the decedent held only a partial equity interest. This might be the case with jointly owned property held with a spouse. In this case, 50% of the property’s value would be attributable to the decedent’s estate.
Assets that are subject to probate are factored into the net calculation, as well as assets held in revocable living trusts. Assets held in an irrevocable trust are not part of the decedent’s estate for tax purposes.
Federal vs. State Estate Taxes
Available deductions, credits, and exemptions can differ between federal estate taxes and state-level taxes. Twelve states and the District of Columbia imposed an estate tax as of 2021. There are also seven states that impose a similar (but different) “inheritance tax.” Maryland levies both estate and inheritance taxes.
Only estates with net values of more than $11.7 million are subject to the federal estate tax in the 2021 tax year. Estate taxes must be paid on the value above $11.7 million. This exclusion threshold is indexed for inflation. It increases to $12.06 million in tax year 2022.
Estate Tax Rates
The rates paid on estate taxes function similarly to those paid on income tax. A specific rate applies to the portion of value that falls within a range.
These amounts only apply to estate values beyond the exclusion threshold. When the chart quotes rates on amounts over $100,000, it actually applies to estates worth more than $11.7 million in 2021 and $12.06 million in 2022. The first $11.7 million are passed on tax-free.
| Estate Tax Rates | |||
|---|---|---|---|
| Column A: Taxable Amount Over | Column B: Taxable Amount Not Over | Column C: Tax on Amount in Column A | Column D: Tax Rate on Excess Over Amount in Column A |
| $0 | $10,000 | $0 | 18% |
| $10,000 | $20,000 | $1,800 | twenty% |
| $20,000 | $40,000 | $3,800 | 22% |
| $40,000 | $60,000 | $8,200 | 24% |
| $60,000 | $80,000 | $13,000 | 26% |
| $80,000 | $100,000 | $18,200 | 28% |
| $100,000 | $150,000 | $23,800 | 30% |
| $150,000 | $250,000 | $38,800 | 32% |
| $250,000 | $500,000 | $70,800 | 3. 4% |
| $500,000 | $750,000 | $155,800 | 37% |
| $750,000 | $1 million | $248,300 | 39% |
| $1 million | $345,800 | 40% | |
Valuation Dates
The Internal Revenue Code provides for two valuation dates: the “date of death” date or the “alternate valuation” date. The date used for an estate’s valuation can ultimately have greater impacts on the estate’s tax liability.
Date-of-Death Estate Valuation
The “date-of-death” estate valuation refers to the fair market value of each estate asset at the time of a deceased’s death. This includes statement values as of that date for bank, investment, and retirement accounts.
The high and low prices on the date of death are averaged and multiplied by the number of shares the decedent owned for publicly-traded stocks held outside a brokerage account. The average prices for the stock on the trading days immediately before and after the date of death are used if the death occurs on a day when the stock market is closed.
The fair market values of more valuable personal effects, business interests, and real estate properties are typically determined by a qualified appraiser.
Alternate-Valuation Date
The “alternate-valuation” date value is the fair market value of all assets included in the decedent’s gross estate six months after the date of death. The personal representative, executor, or trustee of an estate is permitted to choose whether to use the date-of-death values or the alternate-valuation date values if the estate is substantial enough to be subject to federal estate taxes.
Using the alternate-valuation date can reduce the value of the estate if assets are expected to depreciate for any reason during the six months after death. The estate tax bill can thereby be reduced or eliminated entirely.
Use the Same Valuation Date for All Assets
An estate’s assets must be valued as of the alternate date if this option is chosen, not just those that have declined in value. The executor can’t use the date-of-death values for some assets and alternate-valuation date values for others. Some assets might increase in value over six months, potentially erasing any reduction in the overall estate value achieved by assets that have depreciated.
This method might even result in an increased estate value over what it was six months earlier in a worst-case scenario. The decision should be weighed carefully with help from a tax professional or attorney.
The sale price of an asset must be used if the sale is within six months after the date of death, and the alternate-valuation date method has been chosen.
The Date’s Effect on Capital Gains
Another potential downside to using the alternate-valuation date is its effect on the step-up on the basis that beneficiaries receive for capital gains tax purposes. A beneficiary’s cost basis in an asset is either the date-of-death value or the alternate-valuation-date value, which is always elected when the estate settles.
A taxpayer’s basis in an asset is normally the dollar amount paid for an asset plus the cost of capital improvements. The taxpayer pays capital gains tax on the difference between that combined figure and the sales price. This simple use of cost basis won’t work for inheritances because the beneficiary doesn’t “pay” anything for the assets.
A lower cost basis will increase a beneficiary’s tax liability if they later decide to sell their inheritances. The lower the valuation, the more likely it becomes that beneficiaries will realize capital gains when and if they decide to sell.
Frequently Asked Questions (FAQs)
When is the estate tax return due?
IRS Form 706, the United States Estate (and Generation-Skipping Transfer) Tax Return, is due to the IRS within nine months of the date of death unless the estate asks for an extension. The return reports the estate’s value as of the date of death.
Can a date-of-death valuation be done for an interest-bearing account?
Contact the banking or investment institution for a date-of-death valuation in the case of an interest-bearing account. The most recent statement probably will not be accurate as of date of death.
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