When a person passes away, his property is placed into an estate. In exchange for the right to transfer that property to the deceased’s beneficiaries, the estate may need to pay estate tax on its assets. The person who manages the estate, otherwise known as the executor, must calculate the value of the estate and then use the estate's resources to pay the tax. Whether the estate is taxed depends on its total value. Therefore, accurately valuing the assets in a decedent’s estate is vital. Determining the value of stock in an estate can be especially challenging.
Fair Market Value
Generally, the value of stock in an estate is set at its “fair market value” as of the date of the decedent’s death. Fair market value is what a person would be able to sell the stock for if the seller did not have to sell and the buyer did not have to buy. Generally, the price of publicly traded stock can be determined using what the shares sold for on the date the decedent died. So if a decedent owed 100 shares and a share sold for $18 on the day he died, the fair market value of the shares in the estate would be $1,800.
Determining the value of shares of private corporations can be more difficult. Since the shares are not publicly traded, it is unlikely you will be able to reference a sale of the private company’s stock. Federal regulations require you to estimate the shares’ value based on the corporation’s net worth, earning power, potential for dividends and other relevant factors. Other factors include any restrictions placed on the transfer of the stock, the value of other corporate stock that is similar to the business in question and the corporation’s industry in general. Using this criteria, you can estimate what the value of the closely held stock is for estate valuation purposes. For determining the value of the stock and filing the estate tax return, you may want to consider using a financial advisor or special software.
Alternative Valuation Date
Generally, an estate is valued as of the decedent’s death. In some circumstances, the estate is valued as of six months after the decedent’s death. In order to use the alternative valuation date, the total value of the estate must have decreased since the decedent’s death, the amount of the estate tax owed must have also decreased due to the lower estate valuation, and the person who files the estate tax return must elect to use the alternative date on the estate tax return.
Corporations and sales of corporate stock are subject to state laws. In some states, if closely-held corporations do not specify how its stock is to be valued, the state will provide a series of steps the corporation must follow to value its stock when the business wishes to sell shares. Depending on how the state’s laws interact with the federal estate tax, a person valuing an estate may have to use the state’s method of valuing stock when determining the value of the estate.
- Internal Revenue Service: Estate Tax
- Internal Revenue Service: Publication 559 – Estate Tax
- Legal Information Institute: 26 CFR 20.2031-2 – Valuation of Stocks and Bonds
- Moat Associates: Revenue Ruling 59-60 – An Overview
- JL Franklin Wealth Planning: The Alternative Valuation Date and Estate Taxes
- Fordham College: Fair Value of Minority Stocks