Last month, we discussed the role of an executor: the court-appointed person responsible for managing the administration of a deceased individual’s estate. One common duty of an executor is to secure an appraisal of property and assets in an estate. An accurate valuation of estate property, performed by a qualified appraiser, is important because that value can have substantial tax consequences for your estate and your loved ones.
One thing to consider when executing your planning is the capital gains tax. If you purchased a piece of property for $50,000 and it is now worth $200,000, there is a “built-in gain” of $150,000. If you donate the property during your lifetime, the donee (the person you give the property to) will receive a “carry-over” basis (still at $50,000).
If the donee sells the property, the capital gains tax applies to the $150,000 built-in gain. But, if the property transfer happened after your death, the person getting the property would take it at its current value of $200,000. This is the “step-up” in basis available at death, but not available to lifetime gifts. For this reason, many clients choose to hold on to appreciated property, passing it to their loved ones after their death.
There is also Estate and Gift Tax to consider, even though in 2022 it only applies to those dying with assets of more than $12 million ($24 million for a married couple). This lifetime exemption amount can be used for lifetime gifts; the remaining exemption amount is applied to the value of the estate at death. A person dying with an estate of $100 million, who made no lifetime gifts, would pay federal estate tax on the remaining $88 million.
An accurate valuation is necessary to determine how much capital gains tax will be due, and how much will be deducted from the estate tax exemption. When your estate assets are divided equally among various beneficiaries, everyone wants to be sure the values are accurate and current. A qualified appraiser makes the executor’s job easier.
Who is Valuation Important To?
An accurate valuation is essential to executors and heirs, as they both have a lot at stake. It is of the utmost importance that the executor uses reputable sources and approved practices to establish fair market value. If they fail to do so, the duty of care they owe the estate may be violated. In such a case, heirs may take legal action against them, and penalties may be incurred with the IRS.
Failure to file the mandated returns or statements reflecting the basis of a decedent’s property, or inconsistent reporting, can also result in penalties. For example, if the basis of an inherited property is overstated and the property is later sold, the heir of that property can be subjected to a 20% penalty on the amount of understated gain.
In sum, valuing estate property is more than just an accounting exercise. The value of the estate property has significant implications. As an estate executor or administrator, you have a responsibility to make sure that estate property is valued fairly, and as an heir, you have the right to an accurate valuation.
The information provided is not intended to be legal or tax advice and does not constitute any attorney/client relationship. You should consult with an attorney for individual advice regarding your own situation.
Ms. Melancon is an attorney with Legacy Estate & Elder Law of Louisiana, LLC with offices in Baton Rouge, New Orleans and Lake Charles, LA. The primary focus of her practice is estate planning, probate, special needs planning, and elder law. For more information or to attend an upcoming estate planning seminar, call her office at (225) 744-0027.