WHEW! Relief For Co-Executors Whose Attorney Did Not Elect Alternate Valuation…

A Form 706 is required for a taxable estate or for an estate electing portability. Generally, assets are valued as of the date of death to determine an estate tax. The Internal Revenue Code (the “Code”) grants a relief provision if, for example, the stock market crashes or a recession causes assets to decline in value from the date of death until 6 months after the date of death (the “Alternate Valuation Date” or “AV Date”). The valuation at the AV Date must not only decrease the value of the estate but also the estate taxes. If an asset is sold, exchanged, distributed to a beneficiary, or otherwise disposed of within six months of death, then the value is the value as of the disposition date.

Thus, assuming that the taxpayer has no remaining estate tax exemption at the date of death, if assets are valued at 6 million on the date of death and the market crashes and 6 months later the assets are worth 4 million, the executor can use the AV Date to determine the value for estate tax purposes. The executor MUST elect the AV Date on the Form 706.

In Private Letter Ruling (“PLR”) 201825014, co-executors hired an attorney to prepare the Form 706 and the attorney submitted the return within the due date and did not elect the AV Date. After the due date of the return, the co-executors, apparently noting that using the AV Date would reduce estate taxes, filed a “supplemental” Form 706 electing the AV Date. The Internal Revenue Service (the “Service”) denied such election as the election was not made on the Form 706 in a timely manner.

The treasury regulations provide that an extension of time will be granted to make such an election IF the taxpayer demonstrates to the satisfaction of the Service that the taxpayer acted reasonably and in good faith and granting relief would not prejudice the interest of the government. The regulation further provides that a taxpayer is deemed to have acted in good faith if they relied on a qualified tax professional and the tax professional failed to make or advise the taxpayer to make the election.

The Service granted the extension of time to make the election to value the assets as of the AV Date.

ADVICE: If you file a Form 706, then always consider the AV Date. If, for any reason, you should have used the AV Date review this PLR. While a PLR is only directed to the taxpayer requesting the PLR, this PLR will give you guidance. Also note that a protective election for the AV Date can also be made.

Remember also, that while the AV Date will reduce the estate tax, the cost basis for each asset for the beneficiary will also be reduced. Thus, in the example above, if the beneficiary sells the assets for 6 million dollars and the AV Date is used, the gain is 2 million. If, however, the AV Date was not used, then no gain would result. You must look at all tax rates to ascertain the best tax results for  the estate,  the trust and the beneficiaries. In most cases, if the AV Date reduces the estate taxes, then the AV Date should used. However, do not assume.

WORD OF THE WEEK: Statutory election versus regulatory election under the Code. A due date for a regulatory election is prescribed by a regulation published in the Federal Register, or a revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin. A regulatory election is not provided in the Code. An election provided by a statute n the Code is a “statutory” election. Why does it matter? Relief for an extension of time depends on whether it is a statutory or regulatory election and whether there is an automatic extension provided. If no automatic extension is provided, then a PLR is required to obtain an extension.

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