13.4 Considerations Affecting the Estate Taxes

• Library: A Lawyer's Guide to Estate Planning: Fundamentals for the Legal Practitioner (ABA) (2018 Ed.)

13.4 Considerations Affecting the Estate Taxes

13.41 Alternate Valuation Date

The normal date for valuing assets of a decedent's estate is the date of death of the decedent.⁵ The executor has the option, however, of electing to value all assets six months after the date of death.⁶ This date is referred to as the alternate valuation date. The only assets that cannot be valued on the alternate valuation date are assets sold before the six-month date (which are valued at the date of sale) and assets the value of which is affected by the passing of time, such as patents, which are valued at the date of death.⁷ The election to use the alternate valuation date is made on a timely filed federal estate tax return or on one filed no more than one year after the date of death; interestingly, the election cannot be made on an amended return. Once the election is made, it is irrevocable.⁸

The alternate valuation date has importance for both estate tax and income tax planning. The more normal and obvious use of the election is to reduce the amount of estate taxes owed when estate assets have lost value during the first six months of estate administration. A less obvious use of the election is to increase the income tax basis of estate assets to lessen the income taxes that will be owed on a subsequent sale of the assets.

Caution: The alternate valuation date cannot be used when no federal estate tax is owed. The election must decrease both the total value of the gross estate and the federal estate tax liability.⁹ This rule is intended to lessen the ability to use the election to increase the income tax basis in estate assets.

This precludes use of the election for estates passing to the surviving spouse in which the unified credit and marital deduction have been used to defer the payment of any estate tax because there is no estate tax liability in such estates.

Planning Pointer 4

The surviving spouse can disclaim enough of the estate to create a small tax liability, thus complying with part of this rule. In an appropriate situation, the alternate valuation requirements can be met with an overall tax savings.

13.42 Section 303 Stock Redemption

Section 303 of the Internal Revenue Code permits stockholders of a corporation to redeem stock included in the decedent's gross estate to pay death taxes, funeral expenses, and administrative expenses. The redemption will be treated for income tax purposes as a sale or exchange rather than as a dividend. This is a significant benefit. A dividend is ordinary income to the recipient. A sale also results in ordinary income to the seller, but only to the extent the sales price exceeds the income tax basis of the stock. Normally, a redemption occurs shortly after the date of the decedent's death, in which event there will be little, if any, gain because the decedent's stock will receive a stepped-up income tax basis equal to its estate tax value.

Example: The decedent owned 750 shares of common stock in a closely held business that had a date-of-death value of $1,000 per share, for a total value of $750,000. The estate redeems 100 shares to pay the estate taxes, funeral expenses, and administrative costs, all of which total $100,000. Because the basis in the stock is $1,000 per share and that is the price paid for the redeemed stock, there is no gain from the redemption of the stock and no income tax owed because of the redemption.

To qualify for the redemption, all of the stock of the corporation that is included in the decedent's estate must exceed 35% of the decedent's adjusted gross estate. Further, the amount of stock redeemed that qualifies for a Section 303 redemption may not exceed the sum of all estate, inheritance, or other death taxes, plus interest owed thereon (if any) and the funeral and administrative expenses, which are allowable as deductions on the federal estate tax return.¹⁰ If administrative expenses are deducted on the...