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Asset Valuation
A General Rule for Evaluating Assets
The Valuation Date
Included Assets
Determining the Value of Specific Types of Assets
Real Estate
Securities, including stocks
and bonds
Cash
Bank, Credit Union, and Savings and
Loan Accounts
Loans, Notes and Mortgage Values
Business Interests, Including Partnerships
and Corporations
Motor Vehicles, Airplanes, and Boats
Household Furnishings
Life Insurance Policies
IRA, Pension, Retirement, and Other Profit-Sharing
Accounts
Other Assets
Federal Estate Tax Return Filings
The Income Tax Basis for Assets
In Conclusion
It is necessary to determine the fair market value of all the
assets owned whenever someone dies. This process determines
whether or not a federal estate
tax return needs to be filed and the amount of the estate
tax, if any, is due. Also, the valuation can be used to determine
the new income tax basis for the assets owned by the decedent.
This evaluation is made in accordance with the provisions and
regulations of the Internal Revenue Code. While some asset types
require more precision in determining the value than others,
the evaluation procedure is identical whether or not the person
died with sufficient assets to require filing a federal
estate tax.
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A General Rule for Evaluating Assets
If the person who died was a United States citizen or
permanent resident, then he or she is taxed on all owned
assets everywhere in the world. The value used is the
"fair market" value of the assets as of the
date of death, which is the price at which the asset would
be sold between a willing buyer and seller with neither
being compelled to buy or sell.
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The Valuation Date
The date used for valuation purposes is that of the date
of death, although the federal government allows another
date to be used. That other date is six months from the
date of death, but the date selected for evaluation purposes
must be the same for all assets. It is not permitted to
use one date for some assets and the alternative date
for others. If the alternate date is used, the value of
the assets on both the date of death and the alternate
date must be reported, so both must be determined.
In addition, if the alternate date is used, then any
assets that were sold or distributed before the six month
date arrives are valued as of the date of the distribution
or sale. Assets whose only change is the date have the
same value on both dates. Bank accounts, for example,
can have the same value on both dates because the only
change in the value of the account is that of additional
interest earned in the six months following the date of
death.
The only way the alternate valuation date can be used
is if it lowers the estate tax total and the amount of
estate tax due. |
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If there is a surviving spouse who is set to inherit the estate,
thereby avoiding the estate tax, or if the person who died left
less than the amount of the estate tax exemption, then only
the date of death can be used to determine the value of the
assets.
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Included Assets
All of the assets someone owns at the time of his or her death
are subject to taxation. These assets include securities, pension
and profit-sharing plans,
life insurance, IRA accounts, income tax refunds, and physical
assets such as automobiles, furniture, and real estate. Even
assets like municipal bonds that are otherwise exempt from federal
tax are included in estate tax accounting.
If the person who died was married at the time, only half
of the community property and all of his or her separate
property is included. Assets held in joint tenancy or
those subject to a beneficiary designation may avoid probate,
but they are still subject to estate taxes. In the case
of assets held in joint tenancy, if a claim is made that
the surviving joint tenant owned all or part of the assets,
the legal representative of the one who died needs to
prove the claim. Typically, if an asset is held in joint
tenancy, it is presumed that the one who died owned the
entire asset.
If the person who died owned only a partial interest in
some asset, such as 33% of a parcel of real estate, only
the partial interest needs to be valued.
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DETERMINING THE VALUE OF SPECIFIC TYPES OF ASSETS
Real Estate
The value of real property is determined by use of a written
appraisal. For a single family residence, the appraisal
can be done by a local real estate broker or agent and
this appraisal should describe the property, its value,
and how that value was determined. The appraisal should
appear on the appraiser's letterhead. The same agents
or brokers, using the same procedures and submitting the
written appraisal as mentioned, can be used for unimproved
property whose value is $250,000 or less.
Commercial property, including office buildings, apartment
complexes and farms need to be appraised by a reputable
appraiser. This appraisal should be more detailed than
a simple letter and may run up to twenty pages.
The costs that would result from a sale, including future
brokerage commissions and similar costs, are normally
excluded from determining the value of real property.
If the property includes or consists of a farm or ranch,
any farm equipment, livestock, stored seeds and fertilizers
as well as growing or harvested crops are valued separately.
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Securities, including stocks and bonds
Stocks and bonds that are traded on a major exchange or
over the counter have their value determined by averaging
the high and low selling prices on the date of death.
The closing price is not used. If a stock's price fluctuated
between ten and twelve dollars on the date of death, the
average of $11.00 per share is used for determining the
value of the stock.
If the death occurred on a weekend or holiday when the
market is closed, the high and low values for the trading
date prior to the death and those of the next trading
date are "re-averaged."
Mutual funds use the "bid" value, or public
redemption price of the fund as of the date of death to
assign their value. If the death occurs on a weekend or
holiday, however, the value of the fund is that of the
public redemption or bid value as of the date preceding
the date of death.
Any stocks that are traded "ex-dividend" must
also include in their valuation the amount of any dividends
even though that payment occurs in the future. Stocks
considered "ex-dividend" are those for which
a dividend has been declared for the shareholders of record,
but not yet paid.
Bonds must include accrued interest when their value is
determined. Since bonds typically pay interest twice a
year, unless the owner dies on the date of payment, the
interest from the date of the last payment through the
date of death must be computed and included.
If there is no high and low value for a bond on the date
of the owner's death, the average of the closing price
on the date of death and that of the closing price on
the trading day preceding the date of death is used.
United States Treasury notes and bonds are evaluated the
same way as other bonds. United States Treasury bills
are valued at their redemption value, less interest, since
that is included in the bill's price.
United States Series E, EE, H, and HH, Savings Bonds are
valued with the value at which they could be redeemed
during the month of death. The redemption value of these
bonds, which depends on both the month and year of purchase
as well as the redemption date, is available on a website
published by the federal government. Series G, K, H savings
bonds have no value for interest and are valued at their
face value at the date of death.
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Cash
| All cash on hand as of the date of death must be included
in the estate. Foreign currency, if any is held, is valued
at the commercial or retail exchange rate as of the date
of death. If the death occurs on a weekend or bank holiday,
the average exchange rate of the date prior to the death
and that following is averaged. |
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Coins and bills that have a value exceeding their face
value, such as silver certificates or items in a coin
or similar collection, are valued at their potential sales
value instead of their face value.
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Bank, Credit Union, and Savings and Loan Accounts
The exact value of accounts in banks, credit unions, and
saving and loan associations as of the date of death is
used to determine their values. Any checks written against
these accounts, but not yet presented for payment, should
be reported separately so only the net value is listed.
Any interest that has accrued from the date of last payment
through the date of death must be computed and reported
separately.
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Loans, Notes and Mortgage Values
Any loans with outstanding balances as of the date of
death, whether secured or unsecured, are listed with their
value and accrued interest from the date of last payment
until the date of death. If it is possible to report the
note at less than the balance or as uncollectible, the
lower value may be used.
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Business Interests, Including Partnerships and Corporations
If someone dies while having a business interest in a
limited or general partnership, has shares in privately
held corporations, or other business interests, both the
fair market value of the entity as a whole and that of
his or her particular interest must be determined. The
value is frequently discounted, and the accountant who
handles the business tax returns is the best person to
make the necessary determinations.
If the partnership is sufficiently large so as to be traded
on a secondary market, the value can be determined by
using the value that units sell for on the date of the
death.
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Motor Vehicles, Airplanes, and Boats
The value of all vehicles is determined individually using the
sale price as of the date of death. The value of automobiles
may be determined by consulting the "Kelly Blue Book"
or similar publications, and RVs, motorcycles, mobile homes,
boats, or planes have similar publications that can be used
to determine their value.
The price a dealer would pay isn't a proper valuation, but what
a private party buyer would pay can be used as the appraised
value.
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Household Furnishings
The instructions given by the Internal Revenue Service
require an itemized list of the appraised value of furniture
and furnishings, but most accountants ignore this and
use a single entry with a value of $2,000 -- $5,000 for
all the items.
The exceptions to this rule are when the individual's
will or living trust listed specific items such as heirlooms
or expensive jewelry, or if the person who died had separately
held items of high value such as art or some antiques.
The federal estate tax returns requests that items of
artistic or intrinsic value that exceed $3,000 be mentioned,
along with collections of those items that exceed $10,000.
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Life Insurance
Policies
All life insurance proceeds, even those from policies
owned by someone other than one who died and are not,
therefore, subject to taxes, must be reported. Each company
that insured the deceased must furnish a special Internal
Revenue Service form, form 712.
If the person who died owned a life insurance policy on
someone else, this policy needs to be listed along with
its cash value as of the date of death of the holder.
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IRA, Pension, Retirement, and Other Profit-Sharing Accounts
All plans of this nature that someone owned when he or she died
and that are scheduled to pay after death need to have their
value determined using the rules already mentioned. In the case
of an IRA account that was invested in stocks and bonds, those
securities would be valued individually using the rules for
stocks and bonds set forth previously.
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Other Assets
All other assets owned by the person who died have their
values figured by attempting to determine their fair market
value using procedures similar to those used for the assets
listed above. Items of this nature might include royalty
payments, income tax returns due to be received for the
year of death, leasehold and rental payments, deposits,
mineral interests, and annuities that will continue after
death, as well as any other asset.
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FEDERAL ESTATE TAX RETURN
FILINGS
Even though there may be no tax due after a death because
the assets were passed to a surviving spouse or donated
to charity, a federal estate tax must be filed within
nine months if half of the community property and all
of the separately held property exceed a certain amount
that is determined by the year the death occurred. If
additional time is needed to file the estate tax return,
an extension of six months is available from the IRS.
The return will list all assets in the estate, and show
the value of those assets as of the date of death. Those
values are determined using the rules explained elsewhere
and vary according to the nature of the asset.
The total assets in the estate include all real property, stocks
and bonds, business interests, cash in bank or credit union
accounts, pension plans, IRA accounts, certain proceeds from
life insurance policies and annuities, loans or note due to
the person who died, vehicles, personal items, and household
furnishings, among others.
| If the death occurred in 2004 or 2005, $1,500,000 of
the estate's total worth is the allowable exemption. From
2006 through 2008, this amount increases to $2,000,000,
and is scheduled to be increased, again, to $3,500,000
in 2009. Estates that result from deaths occurring in
2010 are set to have no tax
liability whatsoever, or an unlimited amount of exemptions,
but in 2011 the exemption is reduced to $1,000,000. |
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The Internal Revenue Service has up to three years to audit
the filed return and frequently checks the listed values of
securities as part of the process. If they discover an error,
the person who filed the return is notified, and a bill for
any additional taxes and potential penalties is sent if they
feel additional taxes are due.
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THE INCOME TAX BASIS FOR ASSETS
The new income tax basis for the assets is shown on the
estate tax return as well as the identity of the asset's
new owner, which is normally the person who inherited
the asset. If an estate tax return is not required because
the estate fell within the exemptible amount for the year
of the death, the value of each asset is determined using
the same rules as if an estate tax return was required.
If the assets were held in a living trust as community
property prior to the death, or if the assets were held
in both names of a married couple as community property,
both the surviving spouse's half and those of the one
who died get a new income tax basis at the date of death.
Suppose John Smith bought 100 shares of a company years
ago for $2,000 and the stock was worth $10,000 when he
died. If the stocks were held in a living trust as community
property, both his fifty shares and his wife's fifty shares
would each get a new valuation. The stock would now have
an income tax basis of the current $10,000 fair market
value, but the $8,000 potential capital gain would be
canceled. The situation would be the same if all the stock
was John's separate property, too.
If the surviving and deceased spouses held the assets
in joint tenancy, only the half that are reassigned following
the death get a new value. In the example above, if John's
stock was held in joint tenancy, only his half would get
the new $5,000 value. His wife's shares, since they never
change hands, retain their original $1,000 tax basis.
If the person who dies is single or unmarried, then all
assets he or she owns at the time of death get a new value,
even if the assets are held in joint tenancy with another
person.
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In Conclusion
Determining the value of assets at the date of death is a complicated
and confusing ordeal. It is frequently a very involved pursuit,
and anyone put into the position of handling an estate should
consult with an accountant and an estate planning attorney to
make certain that the values reported or assigned are correct
and follow the recommendations and guidelines of the Internal
Revenue Code.
THE MAMOLA LAW FIRM, APC is conveniently located throughout Orange County. For additional information, please contact us at (949) 333-6543.
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