What if a family member dies and you’re the executor of their estate? 

In a previous blog post, I addressed how to handle all the paperwork. Today, I talk about how to value some items in the estate.

Why Is Estate Valuation Needed?

We need a valuation to determine whether to file an estate tax return and how much estate tax to pay.  If the estate is worth close to, or more than $11.4 million (in 2019), then it should file a return.  Even if the estate is worth less than $11.4 million, file a return to let the IRS know the estate is worth less and that’s why you’re not paying estate tax.  Better to volunteer this information to the trolls at the IRS, than to have the trolls come snooping around.

If you have an estate worth more than $11.4 million, the IRS is highly likely to conduct an audit. You will need good documentation.  Here’s a few other trips.

Strategically Set Valuation Date

First, choose which valuation date to use: date of death, or six months after the date of death. If your uncle had a large stock holding that decreased dramatically in the six months after his death, the later date will save you on inheritance taxes. If the housing market where his condo was located crashes weeks after his death, the 6-months-later date is the right choice.  In short: do not settle the estate until at least six months has elapsed!  You won’t know until then the value of the assets in many estates.  Keep your options open.

Valuing Tangible Assets

Second, once you determine the optimal date, claim as low a valuation as is reasonable.  There’s no wiggle room on some assets.  For example, the value of a publicly-traded stock is known and fixed.  The IRS says that the value is the mean between the highest and lowest sales prices on the valuation date (26 CFR § 20.2031-2).  However, judgment and discretion are involved in valuing many items.

The garage sale value of your uncle’s appliances and furnishings from his 3-bedroom condo might be $2,000 on a rainy Saturday morning but $4,000 on a lovely day.  You’re holding the garage sale in bad weather.  Or, that’s what you remember having done.

Valuing his house is trickier. You need an appraiser to give her opinion of the value on the valuation date. The IRS may also get an appraiser.  Its appraisal often comes in much higher than the estate’s. If you and the IRS cannot agree on the house’s value, you will need to file a Tax Court petition and have the judge decide on the value.  If you are in this situation, call me. I get good results with valuation challenges.

Next time: valuing interests in partnerships.

December 16, 2019