calculating fair market value when account owner dies
For estate tax purposes, how does one calculate the FMV of a retirement account on the day of death of the account owner?
1. Is the FMV the balance of the account at the end of the day the account owner died? Or, is like brokerage account where you need to track the high and low and average for that day.
2. If the market is closed on the day of death, how do you calculate the FMV?
3. Are there any adjustments that need to be made to the account balance?
thanks
kathy
Permalink Submitted by mk foss on Mon, 2010-06-21 18:01
Technically you’re supposed to value each asset in the account – just as you would value those assets if the decedent owned them separately. When the market is closed – you follow the same rules as for 706 purposes. Averaging Friday and Monday if they died on a weekend and doing a weighted average if it was some other type of market closure.
Since there is no estate tax in 2010, the importance of fair market value may be limited to trust funding.
Since there is no step-up in basis of retirement plan assets even when there is an estate tax, some people use the balance on the last statement before the date of death to determine the value.
Permalink Submitted by Bruce Steiner on Mon, 2010-06-21 18:46
At one time, we used to send someone to the library to check the high and low prices for the date of death (and, if applicable, alternate valuation date, and the last trading date before and after the date of death or the alternate valuation date if the security did not trade or the market was closed on the valuation date). We would then have to get the information to adjust for ex-dividends, and figure the accrued interest on bonds.
As Mary Kay points out, if the valuation date is on day the market is closed, you take the midway point between the value on the last trading day before the valuation date and the first trading date after the valuation date. But if the market was open but the security did not trade on that date (that was more common many years ago when trading was much less than it is now) you would take an inverse weighted average based upon the number of days (for example, if the particular security traded two trading days before and three days after the valuation date, you would use (60% x the value on the earlier date) plus (40% x the value on the later trading date).
These days, lawyers have software programs tied into valuation databases to price securities for the estate tax return. The paralegal enters the security, the number of shares, and the valuation date, and the software takes it from there.
Also, these days, given the large volume of trading, if a security does not trade for several days, then, depending on the number of shares involved, the lawyer would have to consider the possiblity that the security is so thinly traded that the trades are not the best indication of the value (in other words, whether the decedent’s block should get a blockage discount, or a control premium).
Finally, even in the old days, there was no excuse for a lawyer using the value on the previous month-end statement for purposes of the estate tax return. The lazy approach was to write to the broker for the values (the approach you had to use for bonds since they were generally not traded on an exchange).