Saturday April 20, 2024
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6.1.5 Sec. 2031 - Definition and Valuation of Decedent's Gross Estate
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Sec. 2031 - Definition and Valuation of Decedent's Gross Estate
Gross Estate: A decedent's gross estate includes the value at the time of decedent's death of "all property, real or personal, tangible or intangible, wherever situated."
Alternate Valuation Date: Instead of using the date of death as the valuation date, an executor may elect to value the decedent's estate six months after the decedent's death.
Listed Stocks and Securities: If a decedent's estate contains stocks from companies listed on a public exchange, the stock value is determined by calculating the mean of the highest and lowest selling prices on the day of decedent's death.
Unlisted Stocks and Securities: If a decedent's estate holds stock or securities not listed on an exchange, the value is determined by comparing the non-listed business to a similar business listed on an exchange.
Pledged Securities: The values of securities pledged to secure debt incurred by a decedent, securities held by a decedent's broker and securities bought on margin all are included in a decedent's gross estate at their fair market value on the date of death.
Interest in a Business: The value of a decedent's interest in a business is the fair market value of the business (the amount a willing buyer would pay a willing seller).
Secured or Unsecured Notes: The fair market value of notes, secured or unsecured, is presumed to be the amount of unpaid principal, plus interest accrued to the date of death.
Personal Effects: Generally, a decedent's personal and household effects are valued using their fair market value.
Annuities and Trusts: The present values of annuities, life insurance contracts and trusts are included in a decedent's gross estate.
Land Subject to Qualified Conservation Easement: Land subject to a conservation easement is any land in the United States or its territories that is owned by a decedent or a member of decedent's family during the three years preceding the decedent's death and to which a conservation easement has been given.
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Gross Estate
A decedent's gross estate includes the value at the time of decedent's death of "all property, real or personal, tangible or intangible, wherever situated." Sec. 2031(a). A decedent's estate may include stocks and securities, real estate, business interests, personal effects, annuities and trusts. Each of these items is subject to a valuation determination as set forth in Reg. 20.2031-1.
Alternate Valuation Date
Instead of using the date of death as the valuation date, an executor may elect to value the decedent's estate six months after the decedent's death. An alternate valuation date may be used only if the alternate valuation date will reduce the gross estate and the corresponding estate tax. Sec. 2032(a) and Sec. 2032(c). If selected, the alternate valuation date must be used for all assets in the estate, not merely selected assets. Sec. 2032(a).
Listed Stocks and Securities
If a decedent's estate contains stocks from companies listed on a public exchange, the stock value is determined by calculating the mean of the highest and lowest selling prices on the day of the decedent's death. If the decedent dies on a non-trading day, the value computation is more complex. The value is determined by taking a weighted average of the means of the high and low selling prices on the nearest date before and the nearest date after the date of death. The average is weighted inversely according to the number of trading days between the selling date and the date of death. Reg. 20.2031-2(b).
Unlisted Stocks and Securities
If a decedent's estate holds stock or securities not listed on an exchange, the value is determined by comparing the non-listed business to a similar business listed on an exchange. Sec. 2031(b).
Pledged Securities
The values of securities pledged to secure debt incurred by a decedent, securities held by a decedent's broker and securities bought on margin all are included in a decedent's gross estate at their fair market value on the date of death. Reg. 20.2031-2(g). However, the amount of decedent's indebtedness to a broker or other person to whom securities were pledged may be deducted from the decedent's gross estate under Reg. 20.2053-1 and Reg. 20.2031-2(g).
Interest in a Business
The value of a decedent's interest in a business is the fair market value of the business (the amount a willing buyer would pay a willing seller). Reg. 20.2031-3. Generally, the fair market value includes all of the tangible and intangible business assets divided by the decedent's interest percentage. Reg. 20.2031-3(a).
Secured or Unsecured Notes
Reg. 20.2031-4 states "[t]he fair market value of notes, secured or unsecured, is presumed to be the amount of unpaid principal, plus interest accrued to the date of death, unless the executor establishes that the value is lower or that the notes are worthless."
Personal Effects
Generally, a decedent's personal and household effects are valued using their fair market value. Reg. 20.2031-6(a). However, if a decedent holds $3,000 or more in personal effects (such as jewelry, furs, silverware, paintings and antiques), an expert appraisal must be included with the estate tax return. Reg. 20.2031-6(b). The estate executor also must file a written statement declaring that the appraisal was made under penalty of perjury, including the appraiser's qualifications and stating that the appraiser is a disinterested party to the estate. Certain valuable items must be listed separately. Reg. 20.2031-6(d). For example, books should be listed in separate sets; paintings must be described by size, subject and artist's name; oriental rugs must be listed by size, make and general condition; and silverware must be grouped in sets and listed by weight.
Annuities and Trusts
The present values of annuities, life insurance contracts and trusts are included in a decedent's gross estate. The value of such assets is determined under Reg. 20.2031-7 using Book 3A and Book 3B (IRS Pub. 1457 and Pub. 1458), which contain tables for determining present values.
Book 3A
IRS Pub. 1457, Table S, Sec. 1 contains factors used to determine the present value of life annuities, life estates and remainder interests based on a single life. The factors are based on interest rates ranging from 0.2% to 20.0%, as required by Sec. 7520. The remainder factors may be used to determine the remainder value of interests in pooled income funds. Table R(2), Sec. 2 is used to determine the present value of remainder interests payable at the death of the last person in second-to-die policies. The remainder factors may be used to determine the remainder value of interests in pooled income funds. Table B, Sec. 3 is used in determining the present value of annuities, income interests and remainder interests in term-of-years scenarios.
Book 3B
IRS Pub. 1458 Table U(1), Sec. 1 contains factors used to determine the present value of a remainder interest in a single life unitrust. Table U(2), Sec. 2 is used to determine the present value of a remainder interest in a $1.00 unitrust payable at the death of the second person in a two-life unitrust. $1.00 is used to give an easily adopted percentage to any amount. Table D, Sec. 3 lists the factors for the present value of a term-of-years unitrust.
Land Subject to Qualified Conservation Easement
Land subject to a conservation easement is any land in the United States or its territories that is owned by a decedent or a member of the decedent's family during the three years preceding the decedent's death and to which a conservation easement has been given. Sec. 2031(c)(8)(A). It is also possible for the estate to create a conservation easement after the decedent passes away. Sec. 2031(c)(9).
A conservation easement may result in an exclusion from a decedent's estate of up to $500,000. In general, the reduction in value must be 30% or less of the value of the land before granting the conservation easement. However, if the property is debt financed, then the decedent's estate cannot claim an exclusion. Sec. 2031(c)(4)(A). Debt-financed property is any property on which there is acquisition indebtedness. Sec. 2031(c)(4)(B)(i). Acquisition indebtedness includes unpaid debt the donor incurred to acquire the property, debt incurred pre-acquisition to acquire the property, debt incurred post-acquisition to maintain the property or any renewal or refinancing of debt on the property.
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Private Letter Rulings
PLR
200014013 Estate-Tax-Saving Conservation Easement:
Decedent owned company A and had during life transferred to charity several conservation easements on ranchland owned by company A. The conservation easements were transferred to a qualified organization in accordance with IRC Sec.170(h)(3).
PLR
200147039 Insurance Proceeds Properly Excluded from Estate:
Husband and Wife created a revocable trust and transferred most of their property to the trust. Husband and Wife then created an irrevocable life insurance trust and transferred a second-to-die life insurance policy to that trust. The insurance policy stated that the proceeds of the life insurance policy were to be paid to the insurance trust.
PLR
200206024 Estate Tax Apportionment Statute Applies to Beneficiaries of Taxpayer's Will and Trust:
Pursuant to Taxpayer's estate plan, Taxpayer created a revocable trust and a will. Taxpayer's will provides that Taxpayer's residuary estate pass to Taxpayer's revocable trust. The term "residuary estate" means all of Taxpayer's estate of whatever nature and wherever situated that is not otherwise effectively transferred.
PLR
200221011 Taxpayer's IRA Beneficiary Designation Produces IRD to Estate:
Taxpayer's estate consisted of an IRA and various other assets. Taxpayer named her estate as the beneficiary of her IRA. Taxpayer also created a will providing that specific bequests be given to certain individuals and charities at her death. Once the specific bequests were completed, the residue of Taxpayer's estate would be distributed to qualified charitable organizations.
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Related Topics on Sec. 2031 - Definition and Valuation of Decedent's Gross Estate
1.3.1
Estate Tax Overview:
An estate tax may be levied on the transfer of property when a person passes away. However, an estate distributed to a surviving spouse who is a U.S. citizen is not taxable. Sec. 2001(a). There is also an estate tax exemption, which excludes most estates from this tax.
1.3.2
Estate Applicable Exclusion Amount:
The Estate Tax Rate and Estate Exclusion schedule under EGTRRA 2001 are given.
1.3.3
Charitable Estate Deductions:
A full charitable deduction is permitted for a bequest of cash or property to a charity. Sec. 2055(a). The transfer to charity may be through a specific bequest of a particular asset or a percentage of the whole estate or of the residue. It is essential that the designation be made to a qualified exempt charity.
1.3.4
Marital Deduction:
Since 1981, there has been an unlimited marital deduction. Individuals who are married may transfer any assets outright to a surviving spouse, with the entire transfer qualifying for a marital deduction. Since it is desirable to preserve the value of the applicable exclusion amount for the first spouse to pass away in a bypass or family trust, a common plan is to fund a bypass trust to the maximum amount and transfer the balance of the estate outright or in trust to the surviving spouse.
1.3.5
Disclaimers:
A beneficiary of an estate may disclaim property. If the disclaimer is valid, the assets will pass to a contingent beneficiary or to the residue of the estate.
1.3.6
Estate Tax Calculation and Form 706:
The calculation of estate tax is a cumulative process. That is, all prior gifts and prior taxes payable under current schedules are considered when calculating the current estate tax liability.
1.3.7
Zero Estate Tax Planning:
There are three major potentially favorable areas for philanthropy in The Economic Growth and Tax Reconciliation Relief Act of 2001 (EGTRRA 2001): the inclusion of estate tax reform, the increased opportunity for zero estate tax plans, and the ability to increase transfers to family for those persons with large IRAs or pension plans.
Davenport:
In Estate of Sarah M. Davenport et al. v. Commissioner; T.C. Memo. 2006-215; No. 16060-04 (5 Oct 2006), the court determined that two commercial annuities would be includable in the estate and valued using the Sec. 7520 treasury tables.
Kaufman:
In Gordon Kaufman et ux. v. Commissioner; 136 T.C. No. 13; No. 15997-09 (3 Apr 2011), the Tax Court affirmed a partial summary judgment that denied a charitable deduction for a façade easement.
Wall:
In Frederick M. Wall v. Commissioner; T.C. Memo. 2012-169; No. 17209-09 (18 Jun 2012), the Tax Court determined that a façade easement on a mortgaged home would not qualify for a charitable deduction.
Scheidelman:
In Huda T. Scheidelman v. Commissioner; No. 10-358 (15 Jun 2012), the 2nd Circuit reversed a Tax Court decision denying a charitable deduction for a façade easement with an appraisal based upon a percentage of value method.
Kaufman:
In Gordon Kaufman et ux. v. Commissioner; Nos. 11-2017 (18 Jul 2012), the First Circuit determined that a façade easement deduction was not explicitly precluded by the existence of a mortgage, but they remanded the case to the Tax Court and noted that the local zoning requirements of the historic district may eliminate most of the charitable deduction.
Rothman:
In Steven Rothman et ux v. Commissioner; T.C. Memo. 2012-163; No. 17547-10 (Jun 2012) the Tax Court denied a $290,000 façade easement charitable deduction because the appraiser had used a percentage method.
RP Golf LLC:
In RP Golf, LLC et al. v. Commissioner; T.C. Memo. 2012-282 (2 Oct 2012), the Tax Court ruled on motions for summary judgment with respect to a conservation easement.
Irby:
In Charles R. Irby et ux. et al. v. Commissioner; 139 T.C. No. 14; Nos. 7559-10, 7561-10, 7562-10, (24 Oct 2012), the Tax Court approved a conservation easement deduction as part of a bargain sale.
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