Key Takeaways
- Alternate valuation date: 6 months after death
- QTIP election determines marital deduction qualification
- Section 6166 election for installment payment of estate tax
- Portability election requires timely estate tax return filing
Estate Tax Elections
When an individual dies, the executor or personal representative of the estate has several important estate tax elections available on Form 706 (United States Estate Tax Return). These elections can significantly impact the estate's tax liability and the financial position of the surviving spouse and beneficiaries. Understanding these elections is critical for CFP professionals advising clients on post-mortem estate planning.
Form 706 Filing Requirements
Form 706 is due 9 months after the date of death. A 6-month extension is available by filing Form 4768 (Application for Extension of Time to File a Return and/or Pay U.S. Estate Taxes), extending the due date to 15 months after death. For 2025, a Form 706 filing is required if the gross estate exceeds $13.99 million (increasing to approximately $15 million in 2026, or dropping to approximately $6-7 million if TCJA provisions sunset).
Critical Point: Most elections on Form 706 are irrevocable once made. The executor must carefully analyze each election before filing.
Key Estate Tax Elections
1. Alternate Valuation Date Election (IRC Section 2032)
The alternate valuation date election allows the executor to value the gross estate either at:
- The date of death (default), or
- Six months after death (alternate valuation date)
| Requirement | Detail |
|---|---|
| When available | Only if it reduces both gross estate value AND estate tax liability |
| Assets distributed before 6 months | Valued on date of distribution |
| Where elected | Form 706, Part 3, Line 1 |
| Deadline | Must file Form 706 within the statutory period (including extensions) |
| Basis impact | Beneficiaries receive the alternate (lower) value as their stepped-up basis |
Key Consideration: If estate values have decreased in the 6 months following death (e.g., declining stock market), this election can save significant estate taxes. However, the lower valuation becomes the beneficiaries' income tax basis, potentially increasing capital gains taxes on later sales.
Example: A decedent dies on January 15, 2025, with publicly traded stock worth $5 million. By July 15, 2025 (6 months later), the stock has declined to $4 million. If the estate owes estate tax, the executor may elect the alternate valuation date, reducing the taxable estate by $1 million but also reducing the heir's stepped-up basis to $4 million.
2. QTIP Election (Qualified Terminable Interest Property)
The QTIP election allows the executor to qualify property for the unlimited marital deduction even though the surviving spouse does not have complete control over the property.
| Feature | QTIP Trust Requirement |
|---|---|
| Income | All income must be payable to surviving spouse at least annually |
| Invasion rights | Principal invasion allowed but not required |
| Surviving spouse control | Cannot give spouse power to appoint to others during lifetime |
| Remainder | Passes to remaindermen chosen by first spouse |
| Election location | Form 706, Schedule M |
| Irrevocable | Once made, cannot be revoked |
Planning Implications:
- Partial QTIP elections are permitted, allowing the executor to optimize the amount passing tax-free to the spouse
- Any unused QTIP property will be included in the surviving spouse's gross estate at death
- Commonly used in blended family situations to provide for the surviving spouse while preserving assets for children from a prior marriage
3. Portability Election (Deceased Spousal Unused Exclusion - DSUE)
Portability allows the surviving spouse to use any unused estate tax exemption of the deceased spouse, effectively doubling the exemption amount for married couples.
| Aspect | Requirement |
|---|---|
| 2025 Exemption | $13.99 million per person ($27.98 million combined with portability) |
| How elected | File a complete and timely Form 706, even if no estate tax is due |
| Deadline | 9 months (15 months with extension) from death |
| Late filing relief | Rev. Proc. 2022-32 allows late portability election within 5 years of death if no Form 706 was otherwise required |
| Who benefits | Surviving spouse can use DSUE for lifetime gifts or at death |
TCJA Sunset Alert: If the TCJA provisions expire after 2025, the exemption may drop to approximately $6-7 million per person. Filing for portability now can "lock in" the higher exemption amount from the deceased spouse.
Important: Portability applies only to the estate tax exemption, not the generation-skipping transfer (GST) tax exemption. GST exemption is not portable.
4. Section 6166 Installment Payment Election
This election allows estates that include a closely held business to pay the estate tax attributable to that business in installments over up to 14 years.
| Requirement | Detail |
|---|---|
| Business value threshold | Closely held business must exceed 35% of adjusted gross estate |
| Payment structure | Interest-only for first 4 years, then 10 annual principal installments |
| Interest rate | Preferential 2% rate on first $1.9 million of taxable estate (2025); balance at 45% of regular underpayment rate |
| Election deadline | On or before due date (including extensions) of Form 706 |
| Acceleration events | Disposition of 50%+ of business interest; missed payments |
Example: A decedent's estate includes a family business valued at $10 million out of a $20 million estate (50% business interest). The executor can elect Section 6166, paying only interest for the first 4 years, then spreading the business-related estate tax over 10 annual payments.
5. Section 2032A Special Use Valuation
This election allows farm or real estate used in a closely held business to be valued at its actual use value rather than fair market value.
| Requirement | Detail |
|---|---|
| Maximum reduction | Up to $1.42 million (2025, indexed for inflation) |
| Qualified use | Property must be used in farming or closely held business |
| Material participation | Decedent or family member must have materially participated for 5 of 8 years prior to death |
| Continued use requirement | Qualified heir must continue using property for 10 years or face recapture |
| Election | Schedule A-1 of Form 706 |
Recapture Rule: If the qualified heir disposes of the property or ceases qualified use within 10 years of the decedent's death, additional estate tax becomes due (recapture tax).
Summary Table: Estate Tax Elections
| Election | Purpose | Deadline | Key Benefit | Key Risk/Requirement |
|---|---|---|---|---|
| Alternate Valuation Date (2032) | Value estate 6 months after death | With Form 706 | Reduce estate value if assets declined | Lower basis for beneficiaries |
| QTIP Election | Qualify trust for marital deduction | With Form 706 | Defer estate tax; control remainder | Included in surviving spouse's estate |
| Portability (DSUE) | Transfer unused exemption to spouse | 9-15 months after death (5 years with late relief) | Double effective exemption | Must file Form 706 even if not required |
| Section 6166 | Installment payment of estate tax | With Form 706 | Pay estate tax over 14 years | Business must be 35%+ of estate |
| Section 2032A | Value farm/business at use value | With Form 706 | Reduce value up to $1.42M | 10-year continued use requirement |
Practical Considerations for CFP Professionals
- Timely Advice: Executors should consult with estate planning attorneys and CPAs early in the administration process to evaluate elections
- Portability as Default: For estates below the filing threshold, consider filing Form 706 solely for portability, especially given the potential TCJA sunset
- Coordinate Elections: Some elections interact; for example, using the alternate valuation date affects the basis for QTIP property
- Document Decisions: All election decisions should be documented in writing given their irrevocable nature
- Monitor Deadlines: Missing the Form 706 deadline can forfeit valuable elections (though late portability relief extends this to 5 years)
Quiz: Estate Tax Elections
Question 1: Margaret, a surviving spouse, wants to preserve her deceased husband's unused estate tax exemption. Her husband's estate was worth $8 million in 2025, below the filing threshold. What must the executor do to preserve portability?
A) Nothing; portability is automatic for married couples B) File Form 706 within 9 months (or 15 months with extension) to elect portability C) File Form 709 to transfer the unused exemption D) Wait until Margaret's death to claim the exemption
Answer: B
Explanation: Portability is NOT automatic. Even when no estate tax is due, the executor must file a timely and complete Form 706 to elect portability of the DSUE amount. Under Rev. Proc. 2022-32, late election relief is available within 5 years of death if Form 706 was not otherwise required.
Question 2: Thomas died on March 1, 2025, with a taxable estate of $20 million. By September 1, 2025, the estate's stock portfolio had declined by $3 million. Which statement about the alternate valuation date election is TRUE?
A) The election will automatically apply because the estate value decreased B) The executor can elect the alternate valuation date only if it reduces both gross estate value and estate tax liability C) The alternate valuation date is 12 months after death D) The election does not affect the beneficiaries' stepped-up basis
Answer: B
Explanation: The alternate valuation date election under IRC Section 2032 is available only if it reduces BOTH the gross estate value AND the estate tax liability. The election is not automatic and must be affirmatively made on Form 706. Additionally, the alternate valuation date is 6 months (not 12 months) after death, and it does affect basis (beneficiaries receive the lower alternate value as their basis).
Question 3: A decedent's estate includes a family farm valued at fair market value of $8 million but with a current use value of $5 million. The estate's total value is $15 million. What is the maximum reduction available under Section 2032A special use valuation in 2025?
A) $3 million (the full difference between FMV and use value) B) $1.39 million (the 2025 statutory limit) C) $8 million (the full farm value) D) $5 million (the current use value)
Answer: B
Explanation: While the difference between fair market value and current use value is $3 million, Section 2032A limits the reduction to $1.39 million for 2025 (indexed for inflation). Additionally, qualified heirs must continue using the property in a qualified manner for 10 years or face recapture of the tax benefit.