What is the difference between date-of-death value and alternate valuation?

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Under US tax law, the fundamental difference lies in which valuation date sets the cost basis for heirs: date-of-death value uses the fair market value on the decedent's death, while alternate valuation date uses the value six months later if specific estate tax conditions are met.

• Basis Determination: By default, the IRS requires heirs to use the fair market value (FMV) on the date of death. This standard generally resets the original acquisition cost, potentially creating a step-up or step-down in basis that affects future capital gains.
• Election Requirements: To use the alternate valuation date, the estate executor must file Form 706 and formally elect this option. This election is not automatic and strictly applies only if the total value of the estate, including estate and generation-skipping transfer taxes, is lower when valued six months after death.
• Financial Trade-off: Executing this election can reduce the estate tax liability for the estate, but it may increase the capital gains tax burden for heirs if the asset value has risen during that six-month period. Conversely, if values fell, it might lower the basis for heirs.
• UK Considerations: In the United Kingdom, this specific election does not exist. Inheritance tax calculations are based on the market value on the date of death or, in specific circumstances for real property, within 6 months. UK heirs do not receive a step-up in capital gains tax basis, retaining the deceased’s original cost basis.
• Reporting Obligations: When selling inherited US property, beneficiaries report proceeds on Schedule D and Form 8949. The taxable gain or loss is calculated by comparing the sale price against the elected FMV basis, ensuring accurate tax reporting for both the estate and the individuals involved.

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