This week’s blog is on alternate valuation, sometimes referred to as alternative valuation. Next week, I’ll be writing about disclaimers in greater detail. As I discuss in this week’s blog, disclaimers can often be useful in alternate valuation.

Alternate valuation is an estate tax concept. Normally, you would value the assets in an estate as of the date of death. The tax is then assessed on the net estate as of that date. However, sometimes you can elect to use the alternate valuation date, which is six months after the decedent’s death. In order to make that election, it must result in 1) a lower overall valuation for the estate, and 2) a lower tax due on the estate.

The election to use alternate valuation is particularly useful when there has been a precipitous decline in the value of assets between the date of death and the alternate valuation date. A recent situation involving a Texas billionaire shows how this strategy can save billions of dollars. Here’s the article. Howard Simmons died in December 2013 with about $8 billion. Most of the value was in one stock which decreased $2.8 billion by the alternate valuation date. With a 40% estate tax rate, this decrease in value resulted in a reduction of estate tax of over $1.1 billion.

Of course, some married couples plan not to pay tax at first death. Thus, it would be impossible to elect alternate valuation, even if the assets went down in value. Why? Because, in those plans, everything (over the exclusion) goes to the surviving spouse. In such plans, the spouse could disclaim some of the assets, allowing those assets to flow to other beneficiaries (and for whom the estate would not get a deduction). As a result, there would be some tax due. Thus, electing alternate valuation could reduce or eliminate that tax, allowing the estate to elect to use the alternate valuation date. In the Simmons situation, this saved over $1.1 billion in estate tax.

One caveat: The reduction in estate tax value also reduces the income tax basis of the property to the same level. Thus, instead of having a basis of $4.7 billion, the beneficiaries would have a basis of $1.9 billion. The beneficiaries would have to pay capital gains tax on any gain over their basis. Of course, the rate of capital gains taxation is likely to be much lower than 40%.

Next week, I’ll discuss disclaimers in greater detail. Meanwhile, Happy Birthday, America!

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (800) 846-1555
www.aaepa.com