One component of a Trust Administration is the collection of values for all assets owned by a decedent at his or her date of death. Often, one of the highest valued assets in an estate is an interest in real property. An accurate valuation of this interest is important for several reasons and great care should be taken to secure such valuation.
In most administrations, we enlist the services of an appraiser experienced in this sensitive type of appraisal to value any property the decedent had an interest in. This is true whether the decedent was a full or fractional owner of a property. We have good working relationships with reputable appraisers experienced in valuing commercial land, farmland, and residential properties. When valuing property, the potential costs resulting from a sale, including future brokerage commissions and similar costs, are ordinarily excluded. If the property includes a farm or ranch, any farm equipment, livestock, stored seeds and fertilizers, as well as any crops (growing or harvested), are valued separately.
One of the reasons that valuing land at date of death is important is because it establishes a new cost basis for land being passed on to a beneficiary. If a beneficiary sells inherited land, the sale of such property is ordinarily considered the sale of a capital asset and may be subject to capital gains treatment. The Internal Revenue Code provides that the basis of property acquired from a decedent is its fair market value at the date of death.
In certain circumstances, the IRS allows for the use of an alternate valuation date. This may be able to reduce the amount of estate taxes if it is believed the property in the gross estate will depreciate in the six months after the date of the decedent’s death. The potential disadvantage to this is that the step-up basis that the recipient of the property will receive will also be determined at the alternative valuation date, which could be lower than the date of death.
Estates that owe no federal estate tax or no generation skipping tax may not use the alternative valuation method. Eligible estates must make this election within 1 year after the due date of the federal estate tax return (including extensions). There is no exception to this 1 year rule.
Valuing estate assets can be complex work. When we’re hired to administer an estate we take care to complete this step accurately and efficiently so that all potential benefits are realized.
Contributed by MH Phoenix Estate Planning Attorney Andrea Claus
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This blog should be used for informational purposes only. It does not create an attorney-client relationship with any reader and should not be construed as legal advice. If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.