Valuing an estate properly

Establishing what an estate contained and what it was worth at the date of death serves several purposes at once, and doing it properly at the time is far easier than doing it later.

Why it matters

Basis for heirs. The date-of-death value becomes the new cost basis for inherited assets, which determines capital gains tax whenever they are eventually sold.

Without documentation, establishing that basis years later is difficult and the burden falls on the taxpayer.

Estate tax, where applicable, federal or state.

Fair division. Where an estate is divided in proportions, the values determine what each beneficiary receives.

Executor protection. A documented inventory prepared contemporaneously is the executor's defence against later allegations of mismanagement or undervaluation.

How different assets are valued

Publicly traded securities. Generally the mean of the high and low trading prices on the date of death, with rules for weekends and holidays.

Straightforward and easily documented.

Bank accounts. The balance, plus accrued interest.

Real property. Requires an appraisal by a qualified appraiser.

Tax assessments are not a substitute and frequently bear little relation to market value.

A formal appraisal costs money and is worth it, particularly where the property will be held for some years before sale.

Personal effects. Ordinary household goods can generally be estimated at what they would fetch at a household sale, which is far less than replacement cost.

Items of genuine value — art, jewellery, collections, antiques, firearms — warrant specialist appraisal.

Business interests. The most complex category, requiring a professional business valuation.

Discounts for lack of marketability and for minority interests may apply, and these are a frequent subject of dispute with tax authorities.

Retirement accounts and life insurance. The account balance or the death benefit.

Digital assets, including cryptocurrency, valued at the date of death, which requires records of the holdings.

The alternate valuation date

An election available in some circumstances where an estate tax return is filed.

It permits valuing the estate at a date some months after death rather than at the date of death, and it is generally available only where doing so reduces both the estate value and the tax.

Choosing it affects the basis heirs receive, so the decision involves a trade-off between estate tax and future capital gains tax.

It is not available where no estate tax return is required, which is most estates.

When to spend money on appraisals

A judgement, and the factors are reasonably clear.

Where an estate tax return will be filed, formal appraisals are effectively required.

Where an asset will be held rather than sold soon, an appraisal establishes basis for the future.

Where beneficiaries are dividing assets in kind, an independent valuation prevents disputes about whether the division was fair.

Where the family relationship is strained, documentation is protective.

Where assets will be sold promptly on the open market, the sale price itself is generally good evidence of value and a separate appraisal may be unnecessary.

Documenting it

The practical requirement.

Written appraisals retained permanently. Printed records of security prices on the relevant date. Photographs of personal property. A dated inventory listing every asset and its value.

Copies should go to beneficiaries who are receiving assets, since they will need the basis information whenever they sell — potentially decades later.

This last point is routinely overlooked, and heirs frequently sell inherited property years later with no idea what their basis is.

The common errors

Using tax assessment values for real property.

Valuing personal effects at replacement cost rather than market value.

Failing to identify assets at all — an old account, a life insurance policy, an interest in a family property.

Failing to document, so that the values exist only in the executor's recollection.

And distributing assets before valuing them, which makes the record impossible to reconstruct.

General information only, not legal or tax advice. Valuation rules are technical — consult a qualified attorney and appraiser about your own circumstances.