Alternate Valuation Date

The alternate valuation date (AVD) is an election available to an estate’s executor to value the decedent’s property as of the date six months after death, rather than the standard date of death. The election is designed to ease the tax burden when asset prices fall sharply in the months following a death, but it comes with rigid conditions: the election reduces estate tax only if it also reduces both the gross estate and estate tax liability.

The basic mechanism

The Internal Revenue Code imposes estate tax on the fair market value of property owned by a decedent at the moment of death. For an estate with a September death date, the executor ordinarily values real estate, stocks, bonds, and other assets as of the close of business on that day. That valuation appears on the federal estate tax return (Form 706).

IRC Section 2032 offers the executor an alternative: instead of using the date-of-death value, the executor may elect to value the entire taxable estate six months later. If the decedent owned a $10 million stock portfolio that fell to $6 million by month six, the alternate valuation date would capture the lower $6 million value, shrinking the taxable estate and (if estate taxes apply) cutting tax liability substantially.

The election is binary: it applies to all property in the estate, not to selected assets. An executor cannot pick and choose which assets to revalue; either the entire estate uses the alternate valuation date or none does. This all-or-nothing rule prevents manipulation—an executor cannot revalue fallen stocks while keeping appreciated real estate at the higher date-of-death price.

Timing and exceptions

The six-month window is strict. If property is distributed or disposed of before six months have elapsed, that property is valued as of the date it leaves the estate. Suppose an executor sells the decedent’s home three months after death for $4 million; that home is valued at $4 million for estate tax purposes, not at its hypothetical six-month-later value. Distributions to heirs trigger the same rule: if an heir receives a bank account in month three, the account is valued as of the distribution date.

This creates a planning issue. If an executor does not want to use the alternate valuation date for a particular asset, the executor can ensure it by distributing or selling it within the six months. Conversely, if the executor wants to preserve the benefit for an asset that has fallen in value, the executor must hold it until after the six-month window closes.

The reduction-of-tax requirement

The alternate valuation date offers a tax break, so Congress imposed guardrails. The election is available only if it reduces both the gross estate and the total estate tax liability. This means:

1. The total fair market value of all assets (using the six-month values) must be lower than the date-of-death value.
2. The amount of federal estate tax payable must be lower.

This sounds redundant—if the gross estate shrinks, shouldn’t tax shrink too?—but it prevents misuse. Suppose an estate has $12 million in assets on the date of death but some of those assets have appreciated by month six. Using the alternate valuation date might lower the total estate value (e.g., stocks fell but real estate rose, with stocks dominating), yet the tax calculation could be affected by marginal rates or deductions that happen to rise. The statute requires both the estate value and the tax to fall.

In rare cases, the two requirements can diverge. If the six-month value is lower but the estate’s tax bracket or applicable exemption changed (for example, if a new tax law expanded the exemption retroactively), the tax could rise even as the estate shrunk. The election would be disallowed.

Elections and procedures

The executor files Form 706 (the estate tax return) regardless of whether the alternate valuation date is used. The form includes a checkbox indicating the election. The return must generally be filed within nine months of death (though extensions are available), and the alternate valuation date election is binding once made—it cannot be revoked after the return is filed.

The election affects not only estate tax but also the step-up in basis granted to heirs. If property is revalued using the alternate date, the heir’s basis is stepped up (or down) to that alternate valuation date amount, not the date-of-death value. This can create complex interactions with subsequent capital gains taxation.

Common scenarios

Market crash estates. A decedent dies in January with a stock portfolio worth $20 million. By July, the market has fallen 30%, and the portfolio is worth $14 million. The executor uses the alternate valuation date, locking in the lower value for estate tax and the basis step-up. Heirs inherit at a $14 million basis, so they have less unrealized gain to overcome if they later sell.

Real estate held with appreciated stocks. The decedent’s estate includes $5 million in real estate (stable or slightly up) and $15 million in liquid securities (down 20% by month six). The gross estate is lower on the alternate date ($5 million + $12 million = $17 million versus $20 million), so the alternate date is available. The executor elects it.

Small estates below exemption. If the estate is below the federal estate tax exemption (roughly $13 million per person in recent years), estate tax is zero. Some executors nevertheless make the alternate valuation election for other reasons: to reduce income tax on post-death income allocations, or to lower state-level estate taxes. However, the federal requirement that the election reduce estate tax liability means that if there is no federal estate tax, the election cannot be claimed for federal purposes.

Portability and state taxes

The alternate valuation date election is a federal choice. State estate or inheritance taxes (in states that impose them) follow federal valuation unless state law explicitly mandates otherwise. A few states have decoupled their estate tax from federal rules and impose their own valuation dates; an executor in such a state must separately evaluate the state election.

The federal portability election (allowing a surviving spouse to use the deceased spouse’s unused exemption) is separate from the alternate valuation date election. Both can be made independently.

Income tax and fiduciary accounting

If property remains in the estate (not distributed to heirs) beyond the alternate valuation date, the estate must account for gain or loss between the alternate date and eventual distribution or sale. This post-alternate-date appreciation or depreciation is income to the estate or heirs, taxed under fiduciary income tax rules, not as part of estate valuation.

Executors often consult tax professionals before making the alternate valuation election because it affects not only estate tax but also the heirs’ income tax position and the estate’s own income tax liability.

Limitations and risks

• Irreversibility. Once elected and the return is filed, the election cannot be changed. An executor who later realizes the election was detrimental cannot undo it.
• Partial asset sales. If an asset is sold during the six months at a price that differs significantly from both the date-of-death and six-month fair market values, disputes may arise with the IRS over which value to use.
• Valuation disputes. Using the alternate date does not shield the estate from IRS disputes over what fair market value was on that date. If the IRS believes the six-month appraisal was inflated or deflated, it can challenge the value.
• State variations. Some states have their own estate or inheritance taxes with different valuation dates or rules; federal AVD relief may not apply state-side.

Comparison to Section 6166 deferral

The alternate valuation date reduces the tax bill by shrinking the estate value. Section 6166 deferral reduces the immediate cash burden by stretching payments over 14 years. The two mechanisms serve different purposes: AVD lowers the tax itself, while Section 6166 eases liquidity. An estate might use AVD to minimize tax, then use Section 6166 to spread remaining payments.

See also