Stocks can be passed down to beneficiaries similar to any other asset that is a part of the decedent’s estate plan. However, the inclusion of stocks as part of an estate plan can become a bit complex. If the value of the estate exceeds the estate tax exemption that is applicable at the time of the decedent’s death, then the executor must file an estate tax return, which includes a valuation of all of the estate’s assets – including stocks. Even if the value of the estate does not require the filing of an estate tax return, under current tax law, the executor must know the date-of-death value of the stocks so that they can receive a “step-up” (or step-down) in cost basis. Since the value of stocks can change dramatically from day-to-day or even throughout one day, valuing these assets fairly is a crucial part of assigning value to the entire estate.
When stocks are included in an estate plan, the executor must decide whether the stocks should be valued as of the date the individual passed away or if an alternative valuation date can be used.
Using The Date Of Death To Value Stocks
Generally, when stocks are passed down, the date of death is used as the basis for determining their fair market value (FMV). The fair market value is the amount that any reasonable person who knows the value of the stock would pay to purchase it. The date of death is the default valuation date, and it must be used when the estate isn’t large enough to owe any estate taxes. An alternative valuation date is not available if no estate taxes are due.
But valuing the stock on a specific day can also pose a challenge as most stock prices frequently change throughout the day. It’s is not sufficient to simply pick any price point or using the closing price on the date of death to determine value since this could lead to an unfairly high or low value. Determining the fair market value is done by taking the average of the highest selling price and the lowest selling price of the stock on that date.
For instance, if the stock’s highest selling price on the date of death was $42 and the lowest selling price was $40, the average would be $41. This figure would be used to calculate the value of the stock for the estate.
Using The Alternate Valuation Date To Value Stocks
In instances where an estate tax is owed, the executor can elect to use an alternative valuation date to reduce the estate tax. This option is only available if the estate owes taxes because if the estate owes $0, the estate tax cannot be further reduced. If the executor elects to use the alternative valuation date, they cannot select any date – they must select either the date 6 months after date of death or the date on which the asset was sold (before the end of the 6 month period). Further, the executor cannot value some of the assets on the date of death and others on the alternative valuation date. If the alternative valuation date is selected, it will apply to all of the decedent’s property encompassed in the estate plan.
The executor can only select the alternative valuation date if the value of the estate and the resulting estate taxes would be lower than if the date of death was used. As of 2021, the Internal Revenue Service (IRS) requires estates with combined gross assets and prior taxable gifts exceeding $11.70 million to file a federal estate tax return and pay the applicable estate tax. That threshold applies to the estates of U.S. citizens and U.S. domiciliaries. If the person is not considered a U.S. domiciliary (for example, someone who is here on a work visa or a student visa), then an estate tax return would be required if the “U.S.-situs assets” are worth more than $60,000 (sixty thousand).
Assume you have an estate that has a gross value of approximately $20 million, with around $2 million held in stocks on the date of death. If at six months after the date of death, the value of the stocks and total assets has decreased – for example, to $19.5 million and $1.8 million – then the executor could use these figures for the valuation, which would reduce the amount of estate taxes owed. If, on the other hand, the value increased to $21 million and $2.3 million, respectively, the alternative valuation date would not be an option.
Accounting For Stock Value Fluctuations In Your Estate Plan
When managed properly by an expert estate planning attorney, stock ownership can transfer smoothly and efficiently to beneficiaries without requiring probate court. But wild fluctuations in stock values can have broader impacts on your overall estate plan, which should be fully understood before you decide how to move forward.
For instance, if you leave specific amounts of funding for certain beneficiaries, it may leave others with less than you intended. For example, say you have an estate with $4 million in liquid assets, and you leave $1 million to charitable organizations. When you created the estate plan, this figure represented 25% of your liquid assets. If the stock market takes a downturn by 25% at your death, now the $1 million represents 33% of your liquid assets. So, suppose you intended to leave $3 million to other beneficiaries in your original plan. In that case, the fluctuation in stock prices could substantially impact this figure (in either a negative or positive way).
A good way to avoid this scenario is to include language that names both a price and a percentage, such as, “Named Charity is to receive $1 million or 25% of my liquid assets, whichever is the lesser amount.” Avoiding naming specific amounts and using percentages allows your estate to determine the actual figures when stocks are involved.
Huge swings in stock values can also cause disagreements among beneficiaries. If some beneficiaries receive assets with more stable valuations (such as real estate) and other beneficiaries receive stocks that have either depreciated or appreciated by a large amount, there could be resentment.
In any event, the inclusion of stocks is one of several potential complicating factors in the estate planning process. Individuals must understand all of the potential implications and pitfalls that may come when these assets need to be assigned value and transferred. A skilled estate planning attorney can help you understand how your stocks could be valued upon death and develop strategies that account for substantial fluctuations in stock prices. These strategies will ensure that your estate plan reflects that transfer of assets that you intended.
