Fair market value

Which valuation date applies?

Gift valuation uses the gift date, while federal estate tax ordinarily uses the date of death for each item included in the gross estate, subject to a qualifying alternate valuation election.

An executor may irrevocably elect alternate valuation only if it decreases both the gross estate value and the combined estate and generation skipping transfer tax.

The election covers all property included in the gross estate. Property distributed, sold, exchanged or otherwise disposed of within six months after death uses its disposition date. Other property generally uses the date six months after death.

An interest affected by mere lapse of time uses its date of death value, adjusted for later value differences attributable to causes other than mere lapse of time.

The executor makes the election on the estate tax return. No election is allowed if the return is filed more than one year after its prescribed filing deadline, including extensions.

Prices that need closer examination

For federal estate tax, a forced sale price does not establish fair market value. Use the market in which the item is most commonly sold to the public, considering location where appropriate.

A local tax assessment is usable only if it represents fair market value at the applicable valuation date. Consider all relevant facts and elements of value at that date.

For stocks and bonds, selling prices or bid and asked prices require reasonable modification or other relevant valuation evidence when those pricing methods are established not to reflect fair market value.

Few or sporadic sales near death may be insufficient by themselves for stocks and bonds. That specific rule does not establish a valuation method for every kind of asset.

Real estate given during life

For gift tax reporting of real property, the price in an arm’s length transaction on or before the valuation date is generally the best indication of value.

If no such transaction occurred, use comparable sales. Adjust for differences in sale date, size, condition and location.

Partnership and proprietorship interests

For federal estate tax, a partnership or proprietorship interest is valued at the net amount an informed willing purchaser would pay an informed willing seller, neither under compulsion.

Consider all relevant factors, including an appraisal of tangible and intangible business assets, goodwill, demonstrated earning capacity and applicable corporate stock valuation factors.

Give goodwill special attention when there is no agreement, supported by adequate and full consideration, for the interest to pass at death. Complete supporting financial and expert data should accompany the return.

Agreements and restrictions on property

Federal transfer tax valuation generally disregards rights to acquire or use property below its fair market value determined without that right. It also generally disregards restrictions on selling or using property.

An arrangement escapes that rule only if it meets all three requirements:

• It is a bona fide business arrangement.
• It is not a device to transfer property to the decedent’s family for less than adequate and full consideration.
• Its terms are comparable to similar arrangements made at arm’s length.

Two related terms

Annual gift tax exclusion excludes qualifying present interest gifts up to the applicable annual limit per donor, per recipient, per calendar year. Present interest gifts to a spouse who is not a U.S. citizen use a separate, higher limit only if they would otherwise qualify for the marital deduction.

Basic exclusion amount is the shared exclusion amount for federal estate and gift tax for citizens and residents, applied through a credit against tax.

An investor’s experience with valuation

One participant described using an outside appraiser for a note held through a self directed IRA:

"So we use a third party appraiser that comes in and appraises that note in this particular case. And then that newly appraised value is given to the custodian."

Common questions