Alternate Valuation Date Estate Tax

The Default: Date-of-Death Valuation

For federal estate tax purposes, every asset in the estate is normally valued as of the date the person died. The fair market value on that specific day is what gets reported on Form 706 and what determines the estate tax bill.

For publicly traded stocks, that's straightforward — you look up the closing price. For a closely held business, it means getting a formal appraisal that reflects what a willing buyer would pay a willing seller on that exact date, with both parties having reasonable knowledge of all relevant facts (the Revenue Ruling 59-60 standard).

The Alternate Valuation Date: Six Months Later

Under Internal Revenue Code Section 2032, the executor can elect to value all estate assets as of a date exactly six months after the date of death instead of the date of death itself. This is the alternate valuation date.

The election is all-or-nothing. You can't cherry-pick — you either value every asset in the estate at the alternate date, or you value everything at the date of death. Assets sold or distributed before the six-month mark are valued as of their disposition date.

When It Saves Money

The alternate valuation date exists specifically for situations where estate assets decline in value during the six months following death. If the total estate value drops, the estate tax bill drops with it.

This is especially valuable for estates that include a closely held business. A business can lose significant value quickly after an owner dies — key customers leave, employees quit, revenue drops, contracts lapse. A business worth $2 million on the date of death might appraise at $1.4 million six months later after losing its primary client relationships.

The election also helps when the owner dies during a market downturn. If the estate holds a diversified investment portfolio that dropped 15% in the six months following death, the alternate date captures that decline.

When You Can't Use It

The IRS imposes two conditions:

1. The election must decrease the total gross estate value — you can't use it to increase value
2. The election must decrease the estate tax liability — if the estate is already below the federal exemption threshold and owes no tax, the election isn't available

The second condition matters more than it might seem. If the estate qualifies for a full marital deduction (everything passes to the surviving spouse) and owes zero estate tax regardless of valuation, the alternate date election is prohibited. The IRS doesn't allow the election purely to give heirs a higher stepped-up basis.

The Stepped-Up Basis Trade-Off

This is where executors need to think carefully. Assets inherited from a deceased person receive a stepped-up cost basis equal to their estate tax value. If you elect the alternate valuation date and the assets are worth less at the six-month mark, the heirs get a lower stepped-up basis — which means a larger capital gains tax bill when they eventually sell.

The right choice depends on the math:

• Compare the actual estate-tax savings with the potential capital-gains tax from a lower basis; the result depends on the estate and what the heirs do with the assets
• If the heirs plan to sell the business immediately, the reduced basis could create a capital gains hit that offsets much of the estate tax savings
• If the estate is close to the federal exemption threshold, the alternate date might push it under — eliminating estate tax entirely while the basis reduction may have minimal practical impact

How to Elect It

The executor makes the election by checking a box on Part 3 of Form 706 (United States Estate Tax Return). The return is due nine months after the date of death, with a six-month extension available.

The election is irrevocable once the return is filed. The executor should have a CPA or estate attorney run the numbers both ways before making the decision.

For Business Owners' Families

If your family's estate includes a closely held business that has lost value since the owner died — fewer customers, key employee departures, revenue decline — the alternate valuation date could save tens or hundreds of thousands in estate tax.

The Small Business Owner Dies toolkit includes a business valuation worksheet and an estate tax planning section that walks through the alternate date analysis alongside the other critical tax decisions the executor faces.