Chapter 8.5 Pre- and Postmortem Planning

• Jurisdiction: Washington

§8.5 PRE- AND POSTMORTEM PLANNING

This section reviews the principal tax-related options and elections that are available to estates and their beneficiaries. The options available with respect to the federal and Washington state estate tax include those relating to the valuation of assets, marital deduction planning, use of disclaimers, and timing of filing tax returns and making tax payments, including deferral of the payment of taxes. Consideration is also given to income tax options and elections available to the estate

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and to the decedent. A relatively comprehensive checklist of postmortem matters, adapted from John R. Price, Contemporary Estate Planning (2d ed. 2000), is included with permission as Appendix B, below. For a review of the federal gift, estate, and GST taxes and Washington state estate taxes, see Chapter 7 (Tax Primer) of this deskbook.

(1) Valuation elections and discounts

This section reviews the tax-related options pertaining to the election of methods for valuation of estate assets as well as discounts that may be available when valuing such assets.

(a) Estate tax valuation—general rule

Under Treas. Reg. § 20.2031-1(b), property included in a decedent's gross estate is valued at its "fair market value at the time of the decedent's death" unless the alternate valuation method is elected as provided in I.R.C. § 2032. (Use of the alternate valuation method is described in §8.4(1)(b), below.) In turn, the regulations describe fair market value as "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts." Treas. Reg. § 20.2031-1(b).

Valuation discounts of various kinds are allowable in valuing certain types of property. As described below, discounts typically are allowable for undivided interests in real property, for minority interests in closely held business enterprises, and in some other cases. In addition, a "blockage" discount may be available in valuing assets for which there is a public market if the quantity included in an estate could not be readily traded. See Estate of McClatchy v. Comm'r, 147 F.3d 1089 (9th Cir. 1998) (IRS conceded blockage discount of 15 percent). Blockage discounts are also sometimes allowed with respect to art objects. Smith's Estate v. Comm'r, 57 T.C. 650, aff'd, 510 F.2d 479 (2d Cir. 1972), cert, denied sub nom. Lowe v. Comm'r, 423 U.S. 827 (1975). For an overview of the many discounts available and judicial commentary on such discounts, see Lance S. Hall, Discounts, Discounts, Discounts, in Valuation Strategies (Jan./Feb. 2016), https://www.bvresources.com/docs/default-source/free-downloads/discounts-discounts-discounts.pdf (available from Business Valuation Resources, LLC).

(b) Alternate valuation method—I.R.C. § 2032

If the alternate valuation method is used, the value of each item of property included in a decedent's gross estate is determined on the

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earlier of the date six months after the decedent's death or the date on which an asset is sold, exchanged, or otherwise disposed of. Although an estate may elect to use the alternate valuation method, an asset whose value is affected by mere lapse of time rather than market change is valued on the date of death and not on the alternate valuation date. The use of the alternate valuation method is limited—it may only be used if (1) the value of a decedent's entire estate decreases between the date of death and the alternate valuation date and (2) the use of alternate valuation will result in a reduction of taxes. I.R.C. § 2032(c). Therefore, an estate subject to an estate tax return filing requirement, but which is not taxable due to a marital or charitable deduction, cannot avail itself of alternate valuation.

Under I.R.C. § 2032, property included in a decedent's gross estate is valued as of the date of the decedent's death unless the executor elects to value the gross estate according to the alternate valuation method. Under the alternate valuation method all items of the gross estate are valued as follows:

(1)	property distributed sold, exchanged, or otherwise disposed of within six months of the decedent's death is valued as of the date of distribution sale, exchange, or other disposition, I.R.C. § 2032(a)(1);
(2)	property not distributed, sold, exchanged, or otherwise disposed of within six months after the decedent's death is valued as of the date six months after the decedent's death, I.R.C. § 2032(a)(2); and
(3)	items that are affected by the mere lapse of time are included at their values as of the date of death (instead of the later date), adjusted for any differences in value that are not due to the mere lapse of time, I.R.C. § 2032(a)(3).

An election to use the alternate valuation method must be made on an estate tax return filed within one year after the time prescribed (including extensions for filing). I.R.C. § 2032(d)(2). An election once made is irrevocable. I.R.C. § 2032(d)(1). If a timely election is not made, it may qualify for an automatic six-month extension under Treas. Reg. § 301.9100-2(b). To qualify, the corrective action must be taken within the extension period. If the estate does not qualify for an automatic extension, the estate may apply for an extension in the discretion of the IRS. Treas. Reg. § 301.9100-3.

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Practice Tip: When preparing a return for a taxable estate, always run a calculation using alternate valuation to determine whether a lower tax will be due that would allow the executor to make the alternate valuation election.

(c) Valuation of real property

General rule

The assessed value of real property does not establish its value for federal estate tax purposes. Under Treas. Reg. § 20.2031-1(b), "[p]roperty shall not be returned at the value at which it is assessed for local tax purposes unless that value represents the fair market value as of the applicable valuation date." Instead, absent some unusual circumstances, such as the purchase of the property by the decedent from a third party shortly before death, or the sale of the real estate by the personal representative to an independent third party shortly after the date of death, with no change in circumstances between the date of purchase or sale and the date of death, the value of real estate should be determined by an independent appraisal.

Fractional interest discount

Discounts generally are allowed in valuing undivided interests in real property, including a deceased spouse's community property interest in real property. Propstra v. United States, 680 F.2d 1248 (9th Cir. 1982). There is a large body of case law on this topic. The Internal Revenue Service may argue that the discount should equal the cost of an action to partition real property. Shepherd v. Comm'r, 115 T.C. 376 (2000), aff'd, 283 F.3d 1258 (2002). Courts frequently consider the ability and cost to partition as a factor. Ludwick v. Comm'r, T.C. Memo. 2010-104 (May 10, 2010). Such discounts also may be available for interests in other property, such as artwork. Estate of Elkins v. Comm'r, 767 F.3d 443 (5th Cir. 2014), aff'g in part, rev'g in part 140 T.C. 86 (2013).

(d) Publicly traded stocks and bonds

Publicly traded securities are valued according to

the mean between the highest and lowest quoted selling prices on the valuation date ... If there were no sales on the valuation date but there were sales on dates within a reasonable period both before and after the valuation date, the fair market value is determined by taking a weighted average of the means between the highest and lowest sales on the nearest date before and the nearest date after the valuation date.

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Treas. Reg. § 20.2031-2(b)(1). There are several services that can be used to value stocks and bonds as of the date of death and the alternate valuation date when the name of the company and CUSIP (securities identification) number are provided.

(e) Closely held business interests; discounts

Closely held business interests for which there is no established market are valued at their fair market value, which requires specific factors regarding the business to be considered. All the assets of a business must be considered, including good will, the earning capacity, and the dividend paying capacity of the business, its book value, the economic outlook of that particular industry, the position of the business in the industry, the management of the business, the control represented by the voting power of the interest, the comparative value of interests in similar businesses that are publicly traded, and the value of any life insurance proceeds received by the company. Treas. Reg. §§ 20.2031-2; see also Rev. Rul. 59-60, 1959-1 C.B. 237. Two appraisals may be required—one of the underlying assets of the business and the other of the business entity itself. The gift and estate tax instructions call for copies of any appraisals to be attached to the return. The IRS may, of course, conduct its own appraisal and may reach a much different conclusion as to value.

Pay careful attention when the taxpayer desires to use the terms of a buy-sell agreement among family members (or rely on any other right or restriction relating to property) to establish value for gift, estate, and generation-skipping transfer tax purposes. The general rule under I.R.C. § 2703 is that the value of any property is determined without regard to any right or restriction relating to the property, unless certain exceptions are satisfied.

Under I.R.C. § 2703(b), a right or restriction will not be disregarded if it satisfies the following three requirements:

(1)	the right or restriction is a bona fide business arrangement;
(2)	the right or

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