Alternate Valuation: The Silver Lining to the Cloud Over the Market?

In 1998, the stock market took a big hit, causing a lot of people to lose money. But one good thing that can come out of it is potential estate tax savings. If someone dies when the stock market is high, their estate might have to pay a lot in taxes. But if the stock market goes down after they die, their estate might owe less in taxes. For example, if someone’s assets were worth $5 million when they died, they might owe $2.2 million in taxes. But if their assets were only worth $4.3 million a few months later, they might only owe $1.8 million in taxes. This could save their estate $385,000. So even though the stock market crash was bad, some people might actually benefit from it when it comes to taxes. When someone dies, the value of everything they own is usually based on the fair market value at the time of their death. However, there is an alternate way to value their estate if it has decreased in value within six months after their death. This can help reduce the amount of taxes owed. This alternate valuation method takes into account any property that has been distributed, sold, exchanged, or disposed of within six months after the person’s death. It also adjusts for any changes in value that are not just due to the passage of time.

For example, if a trust is divided into separate trusts for the deceased person’s children, that is considered a distribution. On the other hand, if a trust is divided into two equal parts to make it easier to pay income to the beneficiaries, that is not considered a distribution. The rules also specify who can distribute, sell, exchange, or dispose of property, and when that action is considered complete.

The alternate value also has to account for changes in the value of certain property interests over time, such as life estates or remainders. This is so that the value isn’t affected just because time has passed. When someone dies, their estate may have to pay taxes on their assets. One option is to use the “alternate valuation method,” which values the assets at a later date, potentially lowering the amount of taxes owed. However, this can only be done if it reduces the overall amount of taxes owed. The election to use this method must be made on the estate tax return, and once it’s made, it’s permanent. It can also affect other tax laws relating to businesses and family-owned assets. The election of alternate valuation for assets in an estate can have a big impact on taxes. It may be beneficial to choose this option when the first spouse dies, instead of waiting until the second death. This can help lower the overall estate taxes for both spouses. In some cases, post-death planning can be used to make this option work. For example, the surviving spouse may be able to trigger some estate taxes by giving up part of the inherited property. Overall, choosing the right valuation method for estate assets can have a big impact on taxes and should be carefully considered. The choice of whether to elect alternate valuation on the first death will depend on the type of formula clause used to fund the CST and the marital bequest. If alternate valuation is not elected, a significant portion of the decedent’s applicable credit amount would be wasted, and the CST beneficiaries would be detrimentally affected. However, if alternate valuation is elected, tax savings may be possible. In the aftermath of a market decline, the benefits of alternate valuation are more clear. As the market corrects and hits new highs, don’t forget about the potential tax savings from alternate valuation. Alternate valuation is a method used to determine the value of a person’s assets when they pass away. It can be used to lower the value of the assets for tax purposes. It’s important to follow the rules and regulations set by the government when using this method. If the method is used incorrectly, it could result in penalties and interest. This method can be helpful in certain situations, but it’s important to understand the implications and consult with a professional if needed. The article is written by the Tax Law Section of the Florida Bar. It includes information about two attorneys who specialize in tax law, their qualifications, and the law firms they work for. The Florida Bar is an organization that promotes ethical behavior and education for lawyers.

Source: https://www.floridabar.org/the-florida-bar-journal/alternate-valuation-the-silver-lining-to-the-cloud-over-the-market/