Question

Jim inherits stock ( a capital asset) from his brother, who died in March of 2000 and 16, when the property had a $6.9 million FMV. This property is the only property included in his brothers gross estate and there is a taxable estate. The FMV of the property as of the alternative valuation date was $6.7 million.

a. why might be executor of the brothers the state a left to use the alternative valuation date to value of the property?
b. Why might Jim prefer the executor to use FMV at the time of the death to value of the property?
c. If the marginal estate tax rate is 40% and Jim's marginal income tax rate is 25%, which value should be executor use?

Answer 1

The executor of the brother's estate may choose to use the alternative valuation date to reduce the taxable value. Jim may prefer the FMV at the time of death to obtain a higher cost basis. The executor should use the value of $6.7 million as of the alternative valuation date.

Step-by-step explanation:

a. The executor of the brother's estate may choose to use the alternative valuation date to value the property because it could result in a lower taxable value for the estate. By using the alternative valuation date, which is six months after the date of death, the property's FMV may have decreased, reducing the tax liability.

b. Jim may prefer the executor to use the FMV at the time of death to value the property because it could result in a higher cost basis for the inherited stock. A higher cost basis would reduce the capital gains tax liability if Jim decides to sell the stock in the future.

c. In this case, the executor should use the value of $6.7 million as of the alternative valuation date because it would result in a lower taxable estate, reducing the estate tax liability. Jim's marginal income tax rate is not relevant for determining the value the executor should use.