When you inherit stock, your basis for the stock changes to the value as of the valuation date. The valuation makes a big difference in the amount of taxes you'll pay when you sell the stock. The higher your basis, the smaller your profits. The valuation date that you use depends on which date is used by the estate for estate tax purposes.
Date of Death
The default valuation date for inherited stocks is the date the decedent died. If the estate isn't large enough to owe any estate taxes, you must use the date of death because the alternative valuation date isn't available.
Alternative Valuation Date
If the executor elects, the assets of the estate are valued based on their value on the alternative valuation date, which is six months after the decedent died. The alternative valuation date is only used if the executor elects it. If the election is made, it applies to all of the decedent's property. For example, the executor can't choose to value some of the stocks on the date of death and some on the alternative valuation date.
Decline Required for Alternate Date
The executor can only use the alternative valuation date if the value of the estate and the resulting estate tax bill would be lower than it would be if the normal valuation date was used. For example, the estate was worth $2 million, including $500,000 of stock, when the decedent died. If the stock goes up to $600,000, making the estate worth $2.1 million, the executor can't elect the alternative valuation date because the value of the estate hasn't decreased.
The value of the stocks is measured by the average of the high and low value on the valuation date. For example, on the valuation date the stock traded between $50 and $54. Your basis for each share is $52. If the valuation date is a day the markets are closed, use the average of the high and low for the date before and the high and low for the day after the valuation date. For example, the valuation day is a Sunday. If the stock traded between $60 and $62 on the previous Friday and $61 and $65 on Monday, the value is $62 per share.
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