Alternate Valuation Date

The alternate valuation date is the date six months after a decedent's death which, if the executor elects it under Internal Revenue Code section 2032, replaces the date of death as the valuation date for the entire gross estate. The default rule is the date of death: Treasury regulation 20.2031-1(b) states that the value of every item includible in the gross estate "is its fair market value at the time of the decedent's death, except that if the executor elects the alternate valuation method under section 2032, it is the fair market value thereof at the date, and with the adjustments, prescribed in that section."

Section 2032's own heading is "Alternate valuation," and the date form is the IRS's usage: the Instructions for Form 706 use it throughout and the return's asset schedules carry an "Alternate valuation date" column. A reader who also meets the phrase applicable valuation date in section 1014(a)(2) is looking at the same moment described from the income-tax side, where it supplies the heirs' basis.

Three valuation rules, not one, and the middle one is the reason the election is not simply "six months later." Section 2032(a)(1) values any property distributed, sold, exchanged or otherwise disposed of within six months of the death as of the date of that disposition. Section 2032(a)(2) values property still held at the six-month mark as of that later date. Section 2032(a)(3) takes any interest "affected by mere lapse of time" at its date-of-death value, adjusted only for changes that are not attributable to the passage of time, which stops the election from manufacturing a discount on a term interest, a patent or an annuity simply because it is six months shorter.

The election is all or nothing. The Instructions for Form 706 state the point flatly: "Alternate valuation cannot be applied to only a part of the property." An executor cannot take the six-month value on the assets that fell and the date-of-death value on the assets that rose. Whether the election helps is therefore a question about the estate as a whole, and an estate holding one large position that dropped alongside several that climbed may find the arithmetic works against it.

Section 2032(c) is a two-way gate, and it is where most candidate elections die. No election may be made unless it will decrease both the value of the gross estate and the sum of the chapter 11 estate tax and the chapter 13 generation-skipping transfer tax payable, reduced by allowable credits. An estate below the filing threshold, or one whose tax is already eliminated by the marital or charitable deduction, has no tax to decrease, so the election is unavailable to it however far values have fallen. That closes the obvious strategy of electing the lower value purely to depress the heirs' basis, and it is also why the election is uncommon: it needs a taxable estate and a falling market at the same time.

It is made on the return, and it is irrevocable. Section 2032(d)(1) puts the election in the hands of the executor, on the estate tax return, and makes it permanent once made. Section 2032(d)(2) closes it entirely if the return is filed more than one year after the due date including extensions. The Instructions for Form 706 add two practical points: a protective election may be made by checking the box, writing the word "protective" and filing the return using regular values, which preserves the choice while a valuation is contested; and special-use valuation under section 2032A may be elected in addition to this one, since the two answer different questions.

The marital and charitable deductions do not simply follow the new values. Section 2032(b) requires a bequest to a surviving spouse or to charity to be valued at the date of death, adjusted for any change in value not due to mere lapse of time or the occurrence or nonoccurrence of a contingency. Without that rule an election could shrink the taxable estate while leaving the deductions measured at the old, higher figures.

The cost is the heirs' basis, and it is not optional. Section 1014(a)(2) sets basis at the value used "at the applicable valuation date prescribed by" section 2032 whenever the election is made. A lower estate value is simultaneously a lower starting basis, so the transfer tax saved today is income tax deferred onto whoever eventually sells. For an estate whose assets are likely to recover, that trade can be a poor one, and it is a calculation rather than a rule of thumb.

1. The executor first determines what property was in the gross estate on the date of death. The election changes the valuation date, not the inventory.

2. Each asset is then valued under the rule that fits it: date of disposition for anything that left the estate within six months, the six-month date for everything still held, and the date-of-death value for interests affected only by the lapse of time.

3. The executor tests section 2032(c). If the election does not reduce both the gross estate and the estate and generation-skipping tax, it may not be made.

4. The election is made by checking the box in Part III of the return. It cannot be revoked, and it is unavailable if the return is more than one year late.

5. The values used flow through to the heirs' basis under section 1014(a)(2).

A hypothetical. Rafael dies on 3 March owning a concentrated stock position worth $20,000,000, a commercial building worth $6,000,000, and $4,000,000 of other assets, for a date-of-death gross estate of $30,000,000. The executor sells the building on 10 June, three months after the death, for $5,400,000. On 3 September, six months after the death, the stock is worth $16,000,000 and the other assets are unchanged.

If the executor elects alternate valuation, the building is valued at its sale price of $5,400,000 under section 2032(a)(1) because it left the estate inside the six-month window; the stock is valued at $16,000,000 under (a)(2) because it did not; and the other assets are valued at $4,000,000 on the same date. The gross estate becomes $5,400,000 + $16,000,000 + $4,000,000 = $25,400,000, against $30,000,000 at the date of death, a reduction of $4,600,000. This estate is far above the basic exclusion amount either way, so the election reduces the tax as well as the value and clears the section 2032(c) gate.

The cost lands on the heirs. Their basis in the stock is $16,000,000 rather than $20,000,000, so $4,000,000 of gain that the date-of-death value would have erased becomes taxable if the position recovers.

Pros

• Reflects a genuine decline in value between the death and the six-month date, which the date-of-death rule would otherwise tax as though it never happened.

• Captures the actual sale price of anything the estate had to sell quickly, rather than a paper value nobody received.

• The protective election preserves the choice while a disputed valuation is worked out.

• Can be combined with the section 2032A special-use election, so a farm or closely held business estate does not have to choose between them.

Cons

• All or nothing across the whole gross estate, so a mixed result may leave the estate worse off than the default.

• Lowers the heirs' basis by exactly the amount it lowers the estate, converting transfer tax saved into income tax deferred.

• Unavailable to any estate whose tax is already zero, which is nearly all of them.

• Irrevocable, and gone entirely if the return is more than a year late.

• Requires a second full valuation of the estate six months on, with the appraisal cost that implies.