Assets received from a deceased person through bequest, inheritance or some other mechanism must be assigned a fair market value, or FMV. The FMV is the price at which an asset would sell in the open market, without duress or coercion. Executors use FMV to determine estate taxes, income taxes, charitable donations and division of assets to multiple beneficiaries. Most assets receive a step-up in cost basis to FMV at the time of death, which requires the executor of the estate to assign fair market value based on the available information.
Identify and Classify Assets
Different asset categories include cash, marketable securities, real estate, collectibles, businesses, annuities and personal property. Different standards for determining FMV apply to different asset classes. The executor can look up prices of marketable securities -- including stocks, bonds, and mutual fund shares -- as of the date of death. Security prices are available from the appropriate exchange, an online quote service or a brokerage. The Internal Revenue Service rules set the FMV as the average of the highest and lowest selling price on the date of death. If the security is thinly traded, executors can use the security's sale price on a date reasonably close to deceased's death.
Comparable and Replacement Costs
A common method for determining FMV is to research comparable and replacement costs of other assets. For example, the executor can value a house by referencing the recent sale of comparable properties in the same neighborhood. For insured items like jewelry, the executor can use the amount the insurer would pay in the case of loss. Current prices indicate how much it would cost to replace the property. In some cases, courts, arbitrators, and other authorities might impose a value on an asset. This might occur, for example, when the value is contested in a lawsuit.
Executors can obtain the opinions of experts by hiring appraisers or other qualified individuals to assign fair market values. This is a common practice when evaluating businesses, artworks and collectibles. The expert must be knowledgeable and competent, and must support an opinion with facts and experience. Artworks valued at $50,000 or more might require both an appraisal and a Statement of Value from the IRS.
Activity of Executors
Under Title 26, Section 2032 of the U.S. Code, an executor may use the FMV six months after the death of the benefactor for property that has not yet been distributed. If the deceased's estate makes non-cash charitable contributions of $500 or more, the executor must complete IRS Form 8283. Any donations made by the deceased's estate must use a reasonable FMV. If the executor overstates the value, the IRS may impose penalties ranging from 20 percent to 40 percent of the underpayment of tax related to the overstatement of FMV.
- IRS.gov: Publication 561 Determining the Value of Donated Property
- Cornell University: 26 U.S. Code § 2032 - Alternate Valuation
- IRS.gov: Publication 8283: Noncash Charitable Contributions
- Internal Revenue Service. "Publication 559 Survivors, Executors, and Administrators," Page 14. Accessed Sept. 17, 2020.
- Internal Revenue Service. "Publication 559 Survivors, Executors, and Administrators," Page 3. Accessed Sept. 17, 2020.
- Social Security Administration. "If You Are The Survivor." Accessed Sept. 17, 2020.
- Department of Justice. "206. Priority for the Payment of Claims Due to the Government." Accessed Sept. 18, 2020.
- Internal Revenue Service. "Estate Tax." Accessed Sept. 17, 2020.
- Internal Revenue Service. "Publication 559 Survivors, Executors, and Administrators," Page 13. Accessed Sept. 17, 2020.
Eric Bank is a senior business, finance and real estate writer, freelancing since 2002. He has written thousands of articles about business, finance, insurance, real estate, investing, annuities, taxes, credit repair, accounting and student loans. Eric writes articles, blogs and SEO-friendly website content for dozens of clients worldwide, including get.com, badcredit.org and valuepenguin.com. Eric holds two Master's Degrees -- in Business Administration and in Finance. His website is ericbank.com.