Typically, the value of your gross estate—the total value of all the property and assets you own or have an interest in—is assessed at the time of your death. However, Florida residents also have the option of taking advantage of a tactic known as “alternation valuation.”
With alternate valuation, the executor may opt to value the gross estate on the six-month anniversary of death rather than the date of death. The decision to value the gross estate on an alternate date is an important decision that could impact the amount of taxes the estate is required to pay.
The benefits of alternative valuation. With alternate valuation, your executor may be able to decrease taxes on the estate if the gross estate depreciates during the six months after the date of death. If your estate includes significant stock holdings, alternative valuation might be a good choice if the stock prices are lower on the six month anniversary of your death.
The drawbacks of alternative valuation. A potential drawback of alternate valuation is that the heirs will receive property on a “step up” in the cost basis. This means the value of the property they inherit could be less than the value at the date of death. If the beneficiary wishes to sell the property in the future, they may have to pay a higher tax.
Let’s take a look at an example. Paul bought stock in a pharmaceutical company in the early ‘90s. When Paul dies, the stock price is $25 per share. The executor of Paul’s will, Bernard, decides to use alternate valuation, correctly predicting the stock price will depreciate in the six months following Paul’s death. Six months later, the stock has fallen to $17 per share.
In Paul’s will, he left the stock to his nephew, Richard. Richard receives the asset on a step-up basis to the value declared by the estate. When Richard sells the stock a couple of months later, the stock is valued at $35 per share. Since Richard received the stock on a lower cost basis, he may be required to pay capital gain taxes on his $8 per share profit.
The result? Paul’s estate may have saved money through alternate valuation, but his beneficiary was subject to a lower cost bases and higher taxes.
When Alternate Valuation is Not Applicable
Your executor can only use alternative valuation if it will lower the value of your estate and the sum of the estate tax. If your estate doesn’t owe any estate taxes or generation-skipping taxes, alternate valuation cannot be used.
Additionally, alternate valuation cannot be applied to properties that have already been distributed or sold within the six-month period. You also cannot choose to apply alternative valuation on certain properties, but not on others. That means that once your executor chooses alternate valuation, your entire estate is subject to it, and this decision cannot be reversed. Advance payment of dividends and interest declared after the date of death will be considered part of your gross estate and subject to alternate valuation. However, property earned after your date of death will be excluded from the valuation of your gross estate.
Your executor or personal representative must indicate the decision to use alternate valuation on the federal estate tax return. He or she must decide to use alternative valuation within one year after the federal estate tax return due date. The option cannot be used if the return was already filed. Your executor cannot request an extension on this decision, and once it has been made, the alternate valuation election is irreversible.
Deciding Whether Alternate Valuation is Right for Your Estate
As the owner of your estate, you may choose to include provisions in your will that instruct your executor to utilize alternative valuation if certain conditions are met. When deciding whether to request alternative valuation in your will, you should consider the relative prevailing tax rates for the heirs and beneficiaries to determine if this method will be beneficial.
If you are considering including alternative valuation provisions in your will, it’s advisable to consult with a Florida estate planning attorney who has experience with the alternate valuation method. Your attorney can help you determine whether your estate is eligible for alternative variation, and whether the application of alternative valuation is likely to be beneficial to your heirs. In addition to alternative valuation, your attorney can present you with other options you may want to consider that can help you limit taxes and settle your estate as smoothly as possible.
About the Author:
Christopher Q. Wintter is the founder of Wintter & Associates, P.A. and a board-certified expert in Trust and Estate matters by the Florida Bar. With more than 24 years’ experience as a practicing attorney, he also serves as an instructor and faculty member for the National Institute of Trial Advocacy (NITA)—the nation’s leading provider of legal advocacy skills training to practicing attorneys—and has earned the AV® Preeminent™ rating with LexisNexis Martindale Hubbell. He was also selected for inclusion in Florida Super Lawyers for 2011 and 2012 in Estate and Trust Litigation.