Key Takeaways
- Alternate valuation date must reduce BOTH gross estate AND estate tax liability
- Section 2032A special use valuation maximum reduction: $1,420,000 (2025)
- Section 303 stock redemptions provide tax-favored liquidity for estate taxes
- Section 6166 allows 14-year installment payment for closely held businesses
Postmortem Estate Planning Techniques
Postmortem estate planning refers to the strategies and elections available after a decedent's death to minimize estate taxes, provide liquidity, and optimize the distribution of estate assets. While the best estate planning occurs during lifetime, significant tax savings opportunities remain available to executors and personal representatives who understand these post-death elections.
For CFP candidates, mastering postmortem techniques is essential because many clients will seek advice during estate administration, and the right elections can save hundreds of thousands of dollars in taxes.
Overview of Key Postmortem Elections
| Election/Technique | Purpose | Key Requirements | Deadline |
|---|---|---|---|
| Alternate Valuation Date | Reduce estate value | Must reduce both gross estate AND tax | 6 months after death |
| Special Use Valuation (2032A) | Reduce farm/business real property | 50% gross estate test; 25% real property test | Estate tax return due date |
| Section 303 Redemption | Provide estate liquidity | Stock must be 35%+ of adjusted gross estate | Within 4 years of estate tax due date |
| Section 6166 Installment | Defer estate tax payment | Closely held business interest 35%+ of AGE | Estate tax return due date |
| Qualified Disclaimer | Redirect property transfer | Written, within 9 months, no benefit accepted | 9 months from transfer |
| QTIP Election | Control marital deduction | Elect on estate tax return | Estate tax return due date |
Alternate Valuation Date Election (Section 2032)
The alternate valuation date election allows the executor to value estate assets as of 6 months after the date of death rather than the date of death. This election can provide significant tax savings when asset values decline after death.
Requirements for a Valid Election
The alternate valuation election is only available if it will reduce both:
- The gross estate value, AND
- The estate tax liability (including generation-skipping transfer tax)
Critical CFP Exam Point: If the alternate valuation date would reduce the gross estate but increase or maintain the same tax liability (due to interaction with deductions), the election is NOT permitted.
All-or-Nothing Rule
The election applies to ALL assets in the estate--you cannot selectively apply alternate valuation to some assets while using date-of-death values for others.
Valuation Rules Under Alternate Valuation
| Asset Status | Valuation Approach |
|---|---|
| Assets still held at 6 months | Value as of 6 months after death |
| Assets sold, distributed, or exchanged before 6 months | Value at date of disposition |
| Wasting assets (notes, patents, annuities) | Value at date of death (no alternate valuation) |
Wasting Assets Exception
"Wasting assets" are items whose value declines merely through the passage of time, not market conditions. These include:
- Installment notes receivable (principal declines as payments are received)
- Patents and copyrights (value decreases as term shortens)
- Annuities and life estates (value tied to life expectancy)
- Term interests (value declines as term expires)
Exam Tip: Wasting assets are always valued at date of death, even if the alternate valuation election is made for other estate assets.
Strategic Considerations
The alternate valuation date can be advantageous when:
- Markets decline significantly after death (bear markets, sector crashes)
- Real estate values drop after death
- Business values decrease post-death due to loss of key person
However, remember that using alternate valuation also affects the income tax basis that beneficiaries receive. A lower estate value means a lower stepped-up basis, potentially increasing capital gains taxes when beneficiaries later sell assets.
Special Use Valuation (Section 2032A)
Section 2032A allows executors to value certain farm and closely held business real property at its current use value rather than fair market value (highest and best use). This is particularly important for family farms where development value far exceeds agricultural value.
Maximum Reduction Limits
| Year | Maximum Reduction |
|---|---|
| 2024 | $1,390,000 |
| 2025 | $1,420,000 |
| 2026 | $1,460,000 |
The limit is adjusted annually for inflation.
Qualification Requirements
To elect special use valuation, the estate must meet several tests:
The 50% Test: At least 50% of the adjusted value of the decedent's gross estate must consist of the adjusted value of real and personal property that was being used for a qualified use (farming or closely held business) at the time of death.
The 25% Test: At least 25% of the adjusted value of the decedent's gross estate must consist of the adjusted value of qualified real property (not personal property).
Material Participation Requirement: The decedent or a family member must have materially participated in the operation of the farm or business for at least 5 of the 8 years immediately preceding the decedent's death, disability, or retirement.
Qualified Heir Requirement: The property must pass to a "qualified heir"--generally a family member who will continue the qualified use.
The 10-Year Recapture Period
If, within 10 years after the decedent's death, the qualified heir:
- Disposes of the property to a non-family member, or
- Ceases to use the property for the qualified use (farming/business)
Then recapture tax is due. The recapture amount equals the estate tax savings from using special use valuation.
Recapture Triggers:
- Sale to non-family members
- Conversion to non-qualified use (e.g., farmland becomes subdivision)
- Failure to materially participate in operations
- Cash-rent leases (generally disqualify material participation)
CFP Exam Alert: The recapture period is 10 years from death, and the heir must continue material participation. Cash renting the farm typically triggers recapture.
Section 303 Stock Redemption (Quick Review)
Section 303 provides favorable tax treatment for stock redemptions used to pay estate taxes, funeral expenses, and administration costs. The redemption is treated as a sale or exchange (capital gain) rather than a dividend (ordinary income).
Key Requirements
| Requirement | Details |
|---|---|
| Stock ownership test | Closely held stock must exceed 35% of the adjusted gross estate |
| Amount limit | Redemption cannot exceed estate taxes + funeral/admin expenses |
| Time limit | Must occur within 4 years after the estate tax return due date |
| Coordination | Often used with Section 6166 installment payments |
Note: Section 303 is covered in detail in Section G.58.
Section 6166 Installment Payment Election
Section 6166 allows estates with closely held business interests to defer and pay estate taxes in installments over up to 14 years, with only interest due during the first 4 years.
Qualification Requirements
| Requirement | Details |
|---|---|
| Business interest test | Value of closely held business interest must exceed 35% of adjusted gross estate |
| Ownership test | Decedent must own 20%+ of voting stock (corporations) or 20%+ of partnership capital |
| Active business | Must be engaged in a trade or business (passive investments don't qualify) |
Payment Structure
- Years 1-4: Interest only (at special 2% rate on first $1M+ of deferred tax)
- Years 5-14: Principal and interest in 10 equal annual installments
Interest Rates
- 2% interest applies to estate tax attributable to the first $1,870,000 (2025) of taxable estate value in the business
- 45% of the underpayment rate applies to amounts above that threshold
Acceleration Events:
- Sale of 50%+ of the business interest
- Withdrawal of 50%+ of business assets
- Missing an installment payment
- Having a deficiency assessment
Planning Integration
The most effective postmortem estate planning often combines multiple techniques:
Example: Family Farm Estate
- Elect special use valuation to reduce farm value (up to $1,420,000 reduction in 2025)
- Use Section 6166 to defer estate tax payment over 14 years
- Use Section 303 redemptions of family corporation stock to pay the annual installments
- Consider alternate valuation if commodity prices dropped after death
Example: Declining Market Estate
- Elect alternate valuation to reduce estate value based on 6-month values
- Consider whether qualified disclaimer by surviving spouse would optimize trust funding
- Make QTIP election decisions based on post-decline asset values
Understanding how these elections interact is crucial for optimizing estate outcomes.
Thomas died on March 15, 2025. His estate includes publicly traded stocks worth $2,000,000 at death and $1,700,000 six months later. The estate also includes a patent valued at $500,000 at death. If the executor elects alternate valuation, what value is used for the patent?
The Wilson family farm has a fair market value of $3,500,000 based on development potential, but its agricultural use value is only $1,800,000. The adjusted gross estate is $5,000,000. What is the maximum estate tax reduction available through Section 2032A special use valuation for 2025?
Five years after her father's death, Sarah inherits the family farm that qualified for Section 2032A special use valuation. She decides to cash-rent the farm to a neighbor rather than actively farm it herself. What is the tax consequence?