Valuation of Personal Property in Estate Planning

The value of any type of property—real estate or other—presents a unique challenge for Virginia estate planning attorneys. This is due, in large part, to the volatile nature of market values. Anyone who has every tried to return a car after purchasing it knows the value of the vehicle decreases as soon as it's driven off of the lot. Something of this nature happens to almost all of the things that we possess. Only in estate planning, there are almost always multiple assets and the values don't always move in the same direction.

For federal estate tax liability purposes, the Internal Revenue Service uses fair market value to determine the worth of the item. This is the price that reasonable and knowledgeable sellers and buyers would agree upon if the item were sold in the open market. If the items are stocks in a company, it's fairly easy to calculate value. However, many assets, like antiques or paintings, may be more difficult to appraise. Furthermore, an item can appreciate or depreciate in value from month to month or even day to day. To mitigate the volatility of pricing, the IRS uses the date of death as the point in time at which prices will be calculated. So, for instance, if the testator were to die on January 1, 20XX, then the value of all assets might be calculated on that date—there is an exception to this.

One difficulty with this method of calculation is that the IRS allows nine months to file estate tax paperwork (or fifteen months with an extension). What happens if the value of the assets in the estate changes significantly during that time? If the assets appreciate in value, the estate might benefit from being taxed at the lower original value. However, if the assets depreciate, then it would be unfair to tax them at the higher value nine months after the date of death. Furthermore, if the assets depreciated enough, the taxes could destroy any value that they still have.

For example, you inherit a million shares of stock that are valued at $10 per share at the time of death, but the market falls to $5 during the following nine months, leaving you with $5 million dollars worth of stock. If you were expected to pay 55% of the original value in taxes ($5.5 million) when you file, then there would be nothing left.

To rectify this situation, the IRS allows the executors of estates to select an alternate valuation date of up to six months after the death of the principal. That means that if the executor and estate planning attorney agree that the valuation of the estate would be less on a certain date within six months of the death, they can file for alternate valuation, and an optimal date will be used to determine the fair market value of the assets.

For more information about alternate valuation, contact a reputable Virginia estate planning attorney.