Problems with Exaggerating the Value

Problems with Exaggerating the Value

The Problems with Exaggerating the Value Generally speaking, it is usually to your advantage to establish the highest possible value for stepped-up basis purposes, but there are times when a high date-of-death valuation is not to your advantage. Case in point: an optimistic or exaggerated value will hurt you if the property is
subject to estate taxes.

Example:
Carl’s father passed away a few months ago and left Carl and his sister an estate consisting of the father’s home and two small apartment buildings. The father had owned all three properties for many years; and Carl and his sister plan to keep all three for a few years before selling them. The approximate value of all three properties is $1,500,000. Carl knows he and his sister are entitled to a stepped-up basis on the properties, and he is trying to arrange for the appraisals now. Carl knows there can be variability in appraisals and wants to make the right decisions to minimize taxes. At the time of his father’s death, the federal estate exemption was $1 million.

Estate taxes at the time of this writing start at 37 percent and quickly go up to 50 percent. In the example above, Carl is going to face a certain amount of estate taxes on his father’s estate, but how much? If he hires an appraiser who leans toward a higher valuation, Carl and his sister will receive a higher stepped-up basis but will have to pay more in estate taxes now. In this situation, it is better to get as conservative a valuation as reasonably possible to minimize the estate taxes (37 percent or higher) at the expense of paying future capital gains taxes (20 percent) later.

A second situation in which an overly optimistic valuation may backfire is when, in a case with multiple heirs or partners, one heir or partner will be buying out the interests of the others. Obviously, in this situation a balancing of the respective interests is necessary.