Estate valuation is the process of calculating the value of a gross estate for federal estate tax purposes. The gross estate refers to the value of its assets and properties before taxes and debts are deducted. This includes both properties that are wholly owned by the decedent, and those properties in which decedents had partial equity interests in it.
In this article we will discuss about the methods and steps of valuing an Estate.
Methods to calculate Estate Value
There are two methods of valuing the estate.
Date of Death – This method is used when you are valuing the estate of someone who has died.
Alternate Valuation – This method is used when your valuation date is six months after the date of death as the date of calculation. The “Alternate Valuation” date value is the fair market value of all assets included in the decedent’s gross estate.
Under the Internal Revenue Code, the personal representative is allowed to choose whether to use the date of death values or the alternate valuation date values.
Steps of valuing an Estate
- Calculate the value of all real property as of the date of calculation – Real property is real estate owned by the decedent, and includes home, business, or rental property. The IRS, require real property values to be determined by a licensed appraiser.
- Any outstanding mortgage on the property needs to be deducted.
- If the decedent was contracted to buy real property and died before the deal was closed, that property can be included subject to the contract.
- Determine the value of financial accounts – To calculate the gross estate you need to add together the values of all the component parts. Determine the value of the financial accounts that are attributable to the estate. In some cases, the whole balance of a financial account may not be attributable to the estate. To decide what part of any financial account is attributable to the estate, following guidelines are used:
- If the account is owned individually, the whole amount should be attributed to the estate.
- If the account is owned jointly with a spouse with rights of survivorship, 50% of its value should be attributed to the estate.
- If the account is owned jointly with any party who has rights of survivorship, other than a spouse, entirely of its value should be attributed to the estate. This may be altered if you can prove that the other party contributed more than half of the value to the account.
- Include jointly owned property – If the decedent owned a property as a joint tenant with rights of survivorship, in most scenarios the full value of the property will be included in the estate. However, if the surviving tenant wishes to purchase the house in full, the full inclusion can be reduced by the amount he pays to the purchase the property.
- Determine the value of life insurance policies – Life insurance policies are included in the gross estate if the decedent’s estate is the beneficiary of the policy, they are also included if the beneficiary is legally obliged to use the proceeds of the policy for benefit of the estate. Regardless of who owns the policies, if they are payable to the estate they will be included. The policies are also included if the decedent possessed any “incidents of ownership” which could have been exercised at the time of death.
- In order to calculate the value of a policy for estate tax purposes, use Internal Revenue Service Form 712.
- You can use the fair market value of the policy if you are calculating the value of the estate for estimation purposes only.
- Life insurance paid to a named beneficiary (excluding estate) is not included in estate value.
- Determine the value of all other property attributable to the estate – Other than financial and property assets, many other things are included in the calculation of the value of the estate. One of the most valuable of these is likely to be any vehicles which are attributable to the estate. Often you can use the value listed in Kelly Blue Book (“the Blue Book”) for vehicles. As with other assets, that percentage of the value of the vehicle included in the estate can vary depending on joint or single ownership. This property could also include things such as household furnishings, artworks and annuities.
- Calculate all allowable deductions – These deductions include the debts owed by reason of the decedent’s death, which includes funeral expenses, as well as attorney and court fees, and any other fees associated with the administration of the estate. The deductions also include all utilities, credit card accounts, loans, mortgages, medical bills, charitable deduction and state of tax deduction, and any other accounts due or incurred before the date of death or date of calculation.
- Now, calculate the total taxable estate – You can do this by adding together the value of all assets due to the estate, and then subtracting the total allowed deduction. This can give you an approximation of the value of the estate.
A personal representative would choose the alternate valuation date values over the date of death estate valuation option, because the estate tax bill can be reduced, if one or more of the estate’s assets have lost significant value during the six months after death. However, if the alternate valuation date values are used, then all the estate’s assets must be revalued–not just those that have declined in value. If an asset is sold during the six months after the date of death, then the sales price of the asset must be used.
The chief downside in using the alternate valuation date values, is that the step-up in basis which beneficiaries receive is locked in at the lower values, which can affect their capital gains liability, should they later decide to sell their inheritances.
Author: Sandeep V. – Analyst