The Alternate Valuation Date Election

Estate tax is calculated on values at death, which is a single day chosen by circumstance. Many systems allow an alternative date where values have fallen since.

What the election does

Instead of the date of death, the estate values assets at a specified later date, commonly some months afterwards, capturing a decline that occurred in the interval.

The election is made on the estate tax return and applies to the estate as a whole, not to individually selected assets.

Assets sold or distributed before the alternate date are generally valued at the date they left the estate, which prevents selective timing of disposals.

The all-or-nothing constraint

An estate cannot use the death date for assets that rose and the alternate date for assets that fell. The whole estate moves together.

That means the election is only useful where the aggregate value declined, and a portfolio with mixed outcomes may show no overall benefit.

The comparison must therefore be run across everything, including real property and business interests, not only the marketable securities where a decline is visible.

The condition that limits its use

Most systems permit the election only where it reduces both the value of the estate and the tax payable, rather than allowing it to be used for other purposes.

An estate below the taxable threshold usually cannot elect, because there is no tax to reduce, even where a lower valuation would suit the heirs for other reasons.

That restriction exists to stop estates electing purely to manipulate the tax basis inherited by beneficiaries.

The basis consequence

Beneficiaries generally take a basis equal to the value used for estate tax purposes, so electing the alternate date lowers their basis along with the estate's value.

A lower basis means a larger gain when the asset is eventually sold, so tax saved by the estate may be recovered later from the heirs.

Whether the election helps overall depends on the relationship between the transfer tax rate and the eventual capital gains position of the people inheriting.

Practical timing pressures

The election is usually irrevocable and must be made on a timely filed return, so the analysis has to be complete before the filing deadline.

That requires two full valuations of the estate rather than one, which adds appraisal cost, particularly where real property or a private business is involved.

Availability, dates and conditions vary by jurisdiction and change over time. This is general explanation rather than tax advice, and any election should be assessed by a qualified professional.