New Expansive Regulations for Alternate Valuation Highlight Need for Sound Estate Planning

To most people Estate Tax are dirty words, but many of us do not spend enough time considering the effects of this dreaded tax. Property remaining in a decedent’s estate, upon death, is taxed on its fair value at the time of death. In many instances, the fair value is very high which can ultimately result in a large amount of taxation on the decedent’s estate. An alternative valuation date may be used in determining a lower value for the owner’s assets and in some cases to help to mitigate such taxes. The IRS has recently proposed new regulations that more clearly outline how an alternative valuation must be applied.

In general, the value of a decedent’s gross estate is determined as of the date of death. However, if the executor makes an election under IRS Code Section 2032, the value of the gross estate may be determined by valuing all the property included in the gross estate as follows:

• Property distributed, sold, exchanged, or otherwise disposed of during the six-month period immediately after the date of death is valued as of the date of distribution, sale, exchange, or other disposition
• Property not distributed, sold, exchanged, or otherwise disposed of during the alternate valuation period is valued as of the date that is six months after the decedent’s death.
• Any interest or estate that is affected by the mere lapse of time is includible at its value as of the date of death, with adjustment for any difference in its value as of the later date that is not due to the mere lapse of time.

The election may be made only if valuing the estate on the alternate valuation date decreases both the value of the gross estate, and the sum of (a) the estate tax imposed on the decedent’s estate and (b) the generation-skipping transfer (GST) tax. Thus, estates that owe no federal estate tax (e.g., on account of the marital or charitable deductions or the Unified Credit) or GST tax can’t elect alternate valuation. This rule prevents estates that have no estate or GST tax liability from making an alternate valuation election in order to get an increased income tax basis—at no transfer tax cost—for property that appreciated in value in the six months after the decedent’s death.

The proposed regulations would provide a nonexclusive list of transactions that constitute distributions, sales, exchanges, or dispositions of property. If an estate’s property was subject to such a transaction during the alternate valuation period, the estate would have to value that property on the transaction date. The value for that property in the gross estate would be the fair market value (FMV) of that property on the date of and immediately before the transaction.

The proposed regulations provide two exceptions under which the estate would be able to use the six-month date and value the property held on that date.

• The first exception would apply only to transactions in which an interest in a corporation, partnership, or other entity includible in the decedent’s gross estate is exchanged for one or more different interests (for example, a different class of stock) in the same entity or in an acquiring or resulting entity or entities during the alternate valuation period. Such transactions might include, without limitation, reorganizations, recapitalizations, mergers, or similar transactions. Under this exception, a FMV test would be substituted for the corporate provisions in the current regulations.
• The second exception applies if, during the alternate valuation period, an estate receives a distribution from a business entity, bank account, or retirement trust and an interest in that entity is includible in the decedent’s gross estate. The estate would be able to use the six-month date to value this property held in the estate.

Several other provisions exist within the proposed regulations including:

• An aggregation rule to be used in calculating the FMV of property that is deemed to be distributed during the alternate valuation period.
• A special rule to be used in determining the portion of a trust includible, by reason of a retained interest, in the decedent’s gross estate.
• A clarification as to when property, the title to which passes by contract or by operation of law, is deemed to be distributed; and who is the person or entity that’s treated as having disposed of the property.
• A provision that if by statute a post-death event has occurred on the decedent’s date of death, the post-death event would not result in a distribution.
• A clarification of the types of factors that impact the FMV property and the effect of which will be recognized.

Talking with your Marcum tax professional can help you learn how these proposed regulations may affect you and your family. In many cases, a tax professional can advise you on estate planning techniques that can greatly reduce or eliminate the impact of the Estate Tax.