When a person dies, the value of his or her estate for tax purposes is its value at the date of death.  However, the tax isn’t due until nine months after death.  If the value of an estate plummets in the nine months after a person’s death, this can create very bad consequences for the heirs – namely, a large amount of tax is due but the assets that will be used to pay the tax have disappeared. 

As you can imagine, this happened fairly frequently following last years stock market crash, when the value of many estates rapidly diminished. 

However, there is a way to reduce the effect of this problem.  An executor can choose to value the estate, not at the date of death, but at the date exactly six months after death, if the resulting tax is lower.  This is known as the “alternative valuation date”.

Not all property can be revalued after six months using this method.  Property that was distributed or sold before the six-month date is valued as of the date when it was distributed or sold, not at the six-month date.  And property that has declined in value simply because of the lapse of six months time (such as a patent or a life estate) can’t be revalued.

Keep in mind that if the alternative valuation date is used, the value of the property at that date becomes the basis of the property for the heirs who receive it.  This means that while the heirs may save as a result of lower estate taxes, they  might end up paying higher capital gains taxes when they sell the assets, because the property has a lower basis.

Occasionally, when different heirs receive different types of assets, this difference in the basis can mean that the alternative valuation date is a net gain for some heirs and a net loss for others.  This can makes the executor’s decision very difficult.