trusts-and-estates
Estate Administration - Evaluation Date for Securities
<p>Suppose an estate has assets (stocks and/or cryptocurrencies) that will go to the primary beneficiary , but the second beneficiary gets a % of the estate (in cash).  How does the estate administrator set a date for valuing the stocks/cryptos for purposes of income tax, inheritance tax, and distribution.</p>
<p>Example, investments are worth $10,000 on the death of the trustor and $10,000 in checking account.  Then $11,000 when the tax return is filed, and $12,000 on the day the assets are distributed.   And the second beneficiary gets 10%.  So the date of the valuation determines whether they get $1000, $1100, or $1200 (for the those assets) paid out of the checking account.</p>

<p>It sort of depends on what the will says, for example if the will says &quot;shall receive 1% of the value of my estate at the moment of my death&quot;, that answers your question. That's a bit unlikely, more probably it just says &quot;shall receive 1% of my estate&quot;, in which case this refers to &quot;the totality of what is left to disburse to beneficiaries&quot;, that is, after obligations have been discharged (debts, taxes, funeral expenses, expense of estate administration).</p>
<p>You also have to disburse specific benefits first, for example &quot;$10,000 to Aunt Luddy&quot;, &quot;the car to cousin Billy&quot;. Thereafter, percentages (implied such as &quot;equally&quot; or explicit such as &quot;2%&quot;) are then computed over the remainder. Ideally, you will know the current value of everything left and can do the math and transfer title all at once. This might be a bit impractical for an entire estate, but it is practical for an estate composed of a bunch of divisible assets. All of the securities can be transferred on one day; the house may be sold a month later and assets re-distributed according to the formula at that point.</p>
<p>In other words, you don't need a fixed instant for computing and distributing the estate, you just need to distribute each asset according to the terms of the estate.</p>

<p>This answer is under U.S. law, with one detour to Canadian tax law. Only the more general rules are stated. Most of the rules stated in the post have exceptions, although they rarely apply.</p>
<p><strong>Estate and Inheritance Tax Valuation</strong></p>
<p>For federal estate tax purposes, assets are valued on date of death unless the estate elects to use the &quot;alternative valuation date&quot; instead which is six months after the date of death. Treasury regulations govern the valuation of marketable securities if a decedent died on a day when the securities markets weren't open for business which basically involves averaging the immediate pre-death and immediate post-death valuation, and on determining the value when the value changes during the course of the date of death.</p>
<p>State inheritance taxes vary on this question. Most states have neither estate taxes nor inheritance taxes. Most state level estate and inheritance taxes still on the books, are either state estate taxes of historic interest only (giving the state a share of the federal estate taxes due under a state tax credit that no longer exists), or are state inheritance taxes imposed upon what an heir or devisee receives (an heir receives an inheritance through intestate succession, a devisee is a named beneficiary of a will) rather than based upon the size of the aggregate estate. Inheritance taxes are usually based upon date of distribution values.</p>
<p><strong>Federal Income Tax Valuation</strong></p>
<p>For purpose of income taxation, and in particular, capital gains taxation, capital assets are assigned a deemed purchase price (called the &quot;basis&quot; of the asset) equal to fair market value on the date of death (subject to some minor anti-evasion rule to avoid phantom tax losses and in cases where assets are transferred to the decedent on the eve of death and then inherited by the person who gave them to the decedent). The basis adjustment is tax free and death does not generally trigger realization of accrued capital gains in capital assets in the U.S.</p>
<p>This rule is called the &quot;step up in basis&quot; at death, even though it could, in principle, lead to an increase or a reduction in the value of the asset for capital gains tax purposes. Inventory does not receive a step up in basis. Neither does intangible income that accrued before death but was paid after death, which is called &quot;income in respect of a decedent&quot;, the most common examples of which are retirement accounts, which are valued for purposes of income taxation at the time of distribution as income to the person receiving it post-death.</p>
<p><strong>Footnote On Canadian Taxation Of Unrealized Capital Gains</strong></p>
<p>In Canada, the general rule is that capital assets of a decedent with unrealized gains and losses (e.g. stock or real estate that was purchased and hasn't been sold) is deemed sold at the date of death for fair market value and that the decedent's estate has liability for the income taxes that would have been due if that had actually happened. At times, historically, there has been a discount of the amount of tax due on the gains payable at death, but I do not know if that is still the state of Canadian capital gains taxation at death.</p>
<p><strong>Valuation For Purposes Of Distribution</strong></p>
<p>Valuation for purposes of distribution depends upon the language of the instrument making the devise of the asset. There are different formulas that treat post-death appreciation or depreciation differently that estate planners can use and they used to put a lot of thought into which formula to choose when estate taxation impacted more people. These formulas typically allocated estate assets between two trusts, one usually called a &quot;family trust&quot; or &quot;credit shelter trust&quot; and the other one usually called a &quot;marital trust&quot; or &quot;QTIP trust&quot; (for qualified terminable interest trust&quot;, even though the acronym makes the use of the word trust redundant). In the mid-1990s, amount excluded from gift and estate taxation used to be $600,000 per person per lifetime of combined gifts and bequests, and not inheritable by a spouse. It is now about $11.5 million per person per lifetime of combined gifts and bequests, with unused exclusions inheritable by a spouse. Thus, the percentage of estates impacted by the gift and estate tax in the U.S. has declined precipitously, and are used far less in estate planning than they used to be.</p>
<p>When the governing instruments aren't unambiguously clear, and in cases where there is no will, the valuation date is established by state statutes and case law. This is not terribly consistent from state to state, and since this issue is determined in the first instance by the personal representative (a.k.a. executors) of the estate, or by the trustee of a trust, subject to objections by interested persons, the black letter law frequently isn't applied very consistently in small estates. Often even when a fiduciary gets it wrong, the amount of the error is so small that it isn't worth litigating in an objection to the distribution amounts.</p>
<p>Most wills and most intestacy statutes, in most cases, mandate that the estate be divided in proportions, rather than in fixed dollar amounts. The most common practice is for the executors to liquidate all of the assets of the estate into a common fund in an estate account, and then to make cash distributions from the common fund in the designated proportions when the estate is closed, effectively valuing the assets at the time of distribution.</p>
<p>The same thing can be done when a will makes specific devises (e.g. &quot;I leave my house to my aunt Eunice&quot;) and then divides the residuary estate after payment of expenses and specific devises in proportions (e.g. &quot;I leave my residuary estate to my descendants by representation&quot;) when the residuary estate is liquidated with inheritances distributed in cash. So, in those cases, the valuation date is not material.</p>
<p>A governing instrument that makes a specific devise that is charged against a devisee's proportional share of inheritance, or otherwise makes the timing of the valuation material, would be unusual. In the rare cases when it comes up, the majority rule is probably that distributions in kind are valued at the time of distribution, but I haven't done a 50 state study of the issue, nor have I ever seen one.</p>
