Stocks can be left to beneficiaries under the terms of a will. When the estate includes this type of bequest, the executor has to make a decision about whether the stocks should be valued as of the date the person died or if an alternative valuation date should be selected. The answer depends on which option offers the option where the estate is required to pay the least amount of tax.
When you inherit stocks, the usual practice is to use the date of death as the basis for setting their cost value. The estate's executors may decide to use an alternative date of six months following the deceased's passing instead. If they make this decision, the beneficiaries must be notified since there will be estate tax implications.
Defining the 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.
Defining Fair Market Value
When stocks are inherited, their fair market value must be determined as of the date of the deceased’s death or as of an alternative date. The fair market value (FMV) is the amount that a reasonable person who knows the value of the stock would pay for it. FMV also assumes that a reasonable amount of time has been given to the buyer to arrange for the purchase of the stock.
Alternative Valuation Dates
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.
Requirements for Alternate Dates
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.
Calculating Total Value
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.
For specific information about whether to choose an alternative valuation date when dealing with stocks in an estate matter, the best option would be to consult a financial services professional and an experienced attorney..
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."