When a client passes away, financial planners have many issues to deal with to help the family or loved ones. Tax planning is one of them, and the tax implications of administering an estate can affect your role in unexpected ways. In a down market and recession, the deceased client's estate may benefit from an unusual tool: the alternate valuation date for estate assets. This technique can make you a tax-planning hero—a great way to entice the next generation to engage your services.

Alternate Valuations

Estate-tax laws require every estate to be valued at death. Nine months later, the executor files an estate-tax return. But if, six months after death, the value of your client's estate has diminished, and the estate-tax liability would be reduced if the assets were valued at that six-month date, you can revalue the assets. With the economy reeling, this revaluation can create a huge tax break.

As with all tax breaks, there are lots of nuances. Crucial details include the rules themselves, the impact on other estate-tax provisions and the varied impact on different estate beneficiaries.

The Rules

Assets are typically valued at the date of the client's death. However, if the assets have declined in value and there is a reduction on the estate tax due, the executor (or sometimes the trustee under a living trust) can elect to use the alternate valuation date. Here are the details you need to get right:

* Irrevocable. If the executor uses this technique on the estate's tax return, the decision is irrevocable. So, the impact on everyone must be resolved in advance.

* Fluid. Assets are often distributed, sold or disposed of throughout the six-month period from the date of death until the estate-tax filing deadline. What happens with stock sold or distributed to beneficiaries two months after death? Those securities would have to be valued as of the date of the distribution or sale.

The timing of a sale or distribution can have a big impact. For instance, the estate's portfolio may have to be rebalanced in order for the estate to comply with the Prudent Investor Act. But compliance could be complicated; the advisor must consider the estate-tax impact of an asset sale in addition to the investment reasons to diversify. You must discuss these issues to help clients plan the estate's investments and distributions.

* Change in form. A transaction that is only a change in form of the assets does not constitute a sale and does not trigger a revaluation. For example, a stock split should not trigger the requirement to value the stock at the date of the split instead of six months later (assuming the estate still holds the same security).

* Joint accounts. Retitling a joint account to the survivor is not a disposition and does not trigger a revaluation.

Potential Complications

If the estate could qualify for other special tax benefits, using the alternate valuation date may not be the best choice.

* Closely held business. If the business constitutes more than 35% of the estate, the estate tax on that business can be deferred and paid over about a 14-year period. So changes in the relative values of business and non- business assets over the six-month period could affect this benefit.

* Tax basis. If an asset is valued six months after the client's death, the value of the asset on that date becomes the beneficiary's tax basis (used for determining gain or loss on sale) for that property, replacing the fair market value at the date of death. Assume the estate consists of an investment account and house bequeathed to the client's older son, and a family business bequeathed to the younger son. If the business declined in value by the six-month date, but the house increased in value, the estate might realize an overall estate-tax savings by using the alternate valuation date. But the elder son might pay more so that his younger brother can save.

The estate-tax savings that stem from using the alternate valuation date may be offset by an increased tax liability when the inherited property is eventually sold. Also, considering that tax rates will likely rise in the future, using this technique could prove costly down the line. To evaluate the net benefits of using the alternate valuation date, you need to consider several issues, including: who pays the tax under the will, estimated estate-tax savings, holding periods for the assets involved, possible income-tax or capital-gains liability and more.