Worth waiting for alternate valuation date?

[shortstop14]

My wife is in the process of helping her brother, the estate executor, determine how to handle their father's estate. They are working with an estate tax attorney to do the final federal and state individual and estate tax returns. But I figured it might make sense to bounce a couple of issues off of the well-informed people here so that we're more prepared for the upcoming meetings.

The value of the estate is far below the federal estate tax exclusion, but above the state estate tax exclusion. All accounts are TOD with just the two beneficiaries - one small IRA and a larger taxable brokerage account. As of the date of death, the total account value was 11% above the exclusion limit where no state estate tax would be owed, and 6% above where only a portion of the estate would be taxed. At this point, the whole estate would be taxed, a high six figure amount. Since the date of death last month, the accounts have increased 3.7%.

Does it make sense to wait six months until the alternate valuation date to determine whether the account valuation drops under the state estate tax exclusions? It will take a bit of a stock pullback in the next five months to pay off. Are there reasons not to wait? The main account is invested primarily in dividend producing stocks, so there is income that someone - the estate or the individuals - will have to claim. Some assets will need to be liquidated to pay the estate tax, which may produce capital gains even after basis reset. No one is in a big hurry to receive the assets, but getting the process resolved will be a relief.

Tax optimization is a never ending puzzle, but there are worse problems to have.

 

[MC Rider]

I thought it was always date of death calculations, but you say state tax, and your state may vary.

Don't know about to wait or not to wait, that is the question.

Um. sorry.

It's a gamble, will you be worse off if you lose? Or about the same?

 

[shortstop14]

Well, as I understand it, the valuation wouldn't ever be adjusted up, only down. So there isn't really a downside risk, at least with the valuation.

 

[Koolau]

My wife is in the process of helping her brother, the estate executor, determine how to handle their father's estate. They are working with an estate tax attorney to do the final federal and state individual and estate tax returns. But I figured it might make sense to bounce a couple of issues off of the well-informed people here so that we're more prepared for the upcoming meetings.

The value of the estate is far below the federal estate tax exclusion, but above the state estate tax exclusion. All accounts are TOD with just the two beneficiaries - one small IRA and a larger taxable brokerage account. As of the date of death, the total account value was 11% above the exclusion limit where no state estate tax would be owed, and 6% above where only a portion of the estate would be taxed. At this point, the whole estate would be taxed, a high six figure amount. Since the date of death last month, the accounts have increased 3.7%.

Does it make sense to wait six months until the alternate valuation date to determine whether the account valuation drops under the state estate tax exclusions? It will take a bit of a stock pullback in the next five months to pay off. Are there reasons not to wait? The main account is invested primarily in dividend producing stocks, so there is income that someone - the estate or the individuals - will have to claim. Some assets will need to be liquidated to pay the estate tax, which may produce capital gains even after basis reset. No one is in a big hurry to receive the assets, but getting the process resolved will be a relief.

Tax optimization is a never ending puzzle, but there are worse problems to have.

Doesn't the estate tax attorney have the answer to your questions?

 

[latexman]

I say, don’t let the tax tail wag the $ dog.

 

[cathy63]

Are you sure you're allowed to use the alternate date? On the Federal side, my understanding of the rule is that you can only use it if estate tax is due and it would be reduced by choosing the alternate date. Since this estate has no Fed estate tax liability, I don't think you can choose the alternate date for Federal purposes.

Does your state law have a provision that allows for a different valuation date than is used on the Fed return?

 

[shortstop14]

Doesn't the estate tax attorney have the answer to your questions?

They indicated it was an option during an initial meeting / hiring negotiation. We have a follow-up meeting scheduled to go over the details, including mid-year filing of tax returns without 1099s. I just like to be prepared in advance in any discussion with lawyers. I've also done my homework on the internet, but sometimes the information can be a big vague.

 

[shortstop14]

Are you sure you're allowed to use the alternate date? On the Federal side, my understanding of the rule is that you can only use it if estate tax is due and it would be reduced by choosing the alternate date. Since this estate has no Fed estate tax liability, I don't think you can choose the alternate date for Federal purposes.

Does your state law have a provision that allows for a different valuation date than is used on the Fed return?

I believe it does in New York state. From New York State Department of Taxation and Finance Office of Counsel (via internet search):

Tax Law section 954(a) provides that “[t]he New York gross estate of a deceased resident
means his federal gross estate as defined in the internal revenue code (whether or not a federal
estate tax return is required to be filed).” Subdivision (c) of section 954 specifically cross-
references the alternate valuation provision of IRC section 2032. We believe that these
provisions indicate intent to allow the IRC section 2032 alternate valuation for purposes of
calculating the New York gross estate in situations where no federal return is required to be filed.

 

[Montecfo]

Apparently some states do allow a state level alternate valuation date.

The downside would be that you would then have a different (lower) state basis for assets versus federal.

 

[shortstop14]

Apparently some states do allow a state level alternate valuation date.

The downside would be that you would then have a different (lower) state basis for assets versus federal.

Interesting point. It's not an issue for us, as we don't live in that state. But my brother-in-law does.

 

[HarveyS]

So you want the estate to drop in value by 11% so you can avoid paying 10% effective tax?

 

[shortstop14]

So you want the estate to drop in value by 11% so you can avoid paying 10% effective tax?

The market will do what it will do. I don't want it to drop, but if it does we have the option to take the lower value and avoid a hefty tax bill. If we pay the estate tax now, and it drops., we're out both the tax amount and the (hopefully temporary) drop. Essentially I can use the lower of the two dates for valuation (and cost basis), and one might allow us to avoid a chunk of tax going out the door.

Feels kind of like market timing, but the rules give an option that it seems imprudent to ignore - unless I'm missing a down side. Someone got this option codified into the tax code for a reason.

 

[SecondCor521]

The downsides I see are (1) the beneficiaries won't have use of the assets while you're waiting, (2) the possible complication of dual basis if that's how NY does it, and (3) the complications of the tax returns by using the AVD, such as where does the income from the assets during the 6 months go (probably on the 1041, but I don't know for sure).

Those don't really seem like that big of a deal in your situation, so if I were in your shoes I'd be inclined to try to do it unless the estate attorney helping you comes up with reasons not to do so.

Since all of the estate assets have to be valued as of the AVD (or the DOD) - one can't pick and choose - I would think it would be simpler to keep all of the estate assets untouched *or* keep very good records on everything that they do so they can reconstruct a balance sheet on both dates.

 

[shortstop14]

Those don't really seem like that big of a deal in your situation, so if I were in your shoes I'd be inclined to try to do it unless the estate attorney helping you comes up with reasons not to do so.

That's pretty much exactly where I think I'm settling. Just concerned I'm missing something obvious that I should factor in. And I appreciate the questions and opinions.

 

[Montecfo]

Just to make it more interesting, and to SecondCor521's points above, in the federal case, I don't think you are actually keeping the estate open an extra 6 months. Instead the alternative valuation date is simply used to define the value as if that were the DOD.

So no worries about putting interim income on the 1041. The estate need not remain open. The record keeping point is a good one.

 

[HarveyS]

I stand corrected. Seems to make perfect sense to wait 6 months and see which option benefits you the most.

 

[Montecfo]

To be clear, there is nothing to "wait" for.

Take care of estate business. Review AVD when filing the estate tax return. If desired, so elect.

 

[SecondCor521]

Here's a version of the scenario that I was thinking about with AVD and distributing the estate before that date that I would wonder how to handle:

In the interim six month period, the IRA gets distributed to two inherited IRAs. Maybe there's still the year of death RMD to take, so that gets split, but brother wants to take more, so he takes 70% of the year of death RMD and the sister takes 30%. Oh, and then since it's their account and they have a 10 year SECURE Act draining period, the brother, for tax reasons, takes an elective distribution into his checking account. Oh, and both of them reallocate the inherited IRAs to their preferred asset allocation.

During this six month period of time, the taxable account gets distributed too. Dividends and interest are paid and are taxed to the brother and sister. The sister, maybe unwisely but maybe it doesn't matter, combines the inherited taxable account into her joint taxable account with OP. She sells some inherited stock she doesn't like. Brother sells some of his stock to go on a nice vacation.

Can you do all of the above? Sure. Can someone sort through all of the above to figure out what the value of the estate assets are on the AVD after all of the transactions, distributions, and mixing? Probably, but it's way above my pay grade.

 

[shortstop14]

Here's a version of the scenario that I was thinking about with AVD and distributing the estate before that date that I would wonder how to handle:

In the interim six month period, the IRA gets distributed to two inherited IRAs. Maybe there's still the year of death RMD to take, so that gets split, but brother wants to take more, so he takes 70% of the year of death RMD and the sister takes 30%. Oh, and then since it's their account and they have a 10 year SECURE Act draining period, the brother, for tax reasons, takes an elective distribution into his checking account. Oh, and both of them reallocate the inherited IRAs to their preferred asset allocation.

During this six month period of time, the taxable account gets distributed too. Dividends and interest are paid and are taxed to the brother and sister. The sister, maybe unwisely but maybe it doesn't matter, combines the inherited taxable account into her joint taxable account with OP. She sells some inherited stock she doesn't like. Brother sells some of his stock to go on a nice vacation.

Can you do all of the above? Sure. Can someone sort through all of the above to figure out what the value of the estate assets are on the AVD after all of the transactions, distributions, and mixing? Probably, but it's way above my pay grade.

Interesting, fortunately some of these don't affect our particular case, but maybe some there are some obstacles to try to avoid. 2026 RMD was already taken. No rush to split the IRA account, no RMD or elective distribution until 2027. The taxable distribution to my wife won't be commingled into our joint assets, it will stay her separate account. The number of shares in the taxable account going to each individual is known, so even if the AVD is used, it should be straightforward, adding in dividends earned over the six month period.

If a distribution split is done early, estate taxes would be collected from both individuals.

We're still inclined to leave the accounts until we decide which date to use, just for simplicity. But it's a question we'll ask the estate attorney in two weeks.

 

[shortstop14]

To be clear, there is nothing to "wait" for.

Take care of estate business. Review AVD when filing the estate tax return. If desired, so elect.

True enough, it really only affects the tax returns. The estate tax is due 90 days after death, so there's time to get that done and identify to funds to pay it. Or, hey, given the reason for my questions, not pay it at all.

 

[all4j]

Can you do all of the above? Sure.

Sounds as if I'm in the minority here & no claim for being a ny atty, but...

I thought if assets were 'touched' ( that is, distributed, sold, exchanged, etc) before the AVD, they were valued at that date or date of death. In other words, to use AVD assets to be handled like OP has...left in place.

Hope OP reports back after atty meeting.

 

[cathy63]

Sounds as if I'm in the minority here & no claim for being a ny atty, but...

I thought if assets were 'touched' ( that is, distributed, sold, exchanged, etc) before the AVD, they were valued at that date or date of death. In other words, to use AVD assets to be handled like OP has...left in place.

Hope OP reports back after atty meeting.

Yes, that's correct under Federal law, and from the posts above it sounds like NY law specifically references Federal law.

 

[shortstop14]

From IRS § 20.2032-1 Alternate valuation.

(1) Any property distributed, sold, exchanged, or otherwise disposed of within 6 months (1 year, if the decedent died on or before December 31, 1970) after the decedent's death is valued as of the date on which it is first distributed, sold, exchanged, or otherwise disposed of;

 

[SecondCor521]

I understand there is a clear rule. I like simplicity, so for me if I wanted to use AVD I'd leave the assets intact until 6 months plus a couple of days just so I wouldn't have to do the tracking and paperwork to comply with the rule.

 

[Montecfo]

Shortstop14,

Yes I think you are right about that after further review. It seems like your choices are: DOD as valuation date, keep estate open till AVD, or distribute assets before 6 months and THAT date becomes the AVD (if value has declined).

But is it really possible or likely an estate with a value sufficient to trigger an estate tax even at the state level could be probated and closed within 6 months?

Not tax advice, just an interesting discussion.