Let's supposed someone dies on June 15. That person's estate tax return and tax payment is due on March 15, 9 months later. Let's suppose in July or August... or maybe even October, the stock market tanks. A good part of the estate is in stocks. If the stocks are valued at the actual date of the death, June 15th, they might have been really high. Maybe they were $100,000. But by October, the market is at a new low and those stocks are now worth only $73,980. That's a big hit. So the IRS is kind of nice. (Well, not really. More on that in a minute.)
The IRS says that instead of using the value on the date of death, the value on the date that is 6 months out, in this case, December 15th can also be considered. The executor than elects to use the lower value when calculating the value of the stock portion of the estate. The estate taxes would then be paid on the lower value. And taxes on a diminished portfolio would be lower. It's almost like the IRS doesn't want to kick you, the beneficiary, when you're down.
Okay, so the IRS isn't really that nice. The beneficiaries now receive the stocks with the cost basis being the lower value. So once the stocks get back to the higher value on date of death - or even higher - the capital gains to the beneficiary will be higher and the beneficiaries will owe more capital gains taxes than they would have had the higher value been taken when filing the estate tax. Remember, short-term capital gains are taxed at your normal rate, whatever that might be. Long-term capital gains are taxed at a lower rate.
I hope this makes some sense to you. I understand that I was able to make an election. And I've been frustrated trying to get date of death values (and alternate valuations) on all my parents' assets for the past month or so. It's not easy. Now I totally understand why. I'm just not sure I gave you the greatest explanation.
Date of death valuations for stocks are the mathematical average of the stock price between highest and lowest on the date of death. For funds, the value is the amount the fund could have been sold for on the day of the death.
xoxoxoxoxoxoxoxoxoxox
For the first time since either one of my parents died, I saw 1137 on a license plate. I was really caught short. It's creepy enough when I see 11:37 on the clock, which happens often enough. I just don't know what to make of it. It's not the affirmation of things being well that it was before. Does it, in fact, mean anything? I stared at it, I had enough presence of mind to pull out my camera and photograph it. And then I was left to wonder.
Recap of today's lesson: If a decedent left investments as assets in the estate (whether in a probate account or within a trust), the assets will be valued at the date of death and then again exactly 6 months later. The executor can elect which value to use for the estate. Normally, the lower value would be elected. Estate taxes are paid on the lower value. The beneficiaries assume the cost basis of the lower value. So if the investments ever return to their original levels, as soon as the beneficiaries sell, they have a larger gain and pay higher capital gains taxes.
If you don't get it, ask! Ask me. Ask your attorney. Ask your lawyer. Read about it in a book.
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