Service · Estate & Date-of-Death

Date-of-death valuation for business and real estate interests.

The number serves three purposes: estate-tax filing, basis step-up, and estate administration. Each pulls in a slightly different direction, and the IRS examination program reviews these filings closely.

This article is valuation commentary. It is not legal, tax, accounting, or investment advice. Specific engagements depend on facts and applicable professional standards.

Why date-of-death valuation matters

When someone with a closely held business interest or significant real estate dies, the executor or trustee usually needs a defensible fair market value as of the date of death (or the alternate valuation date, six months later, if elected). That number serves three distinct purposes:

Estate tax filing. Form 706 requires fair market value for federal estate tax purposes. The IRS examination program reviews these filings closely, especially for property-rich estates and family-owned businesses.
Step-up in basis. The date-of-death value typically becomes the new tax basis for inherited assets. A higher value at death means a higher basis going forward, which reduces capital gains tax on later sale.
Estate administration. Beneficiaries are entitled to know what they received. Co-trustees and beneficiaries with conflicting interests may want their own analysis.

Each purpose pulls in a slightly different direction. The executor wants a value low enough to manage estate-tax exposure but high enough to lock in a meaningful basis step-up for the beneficiaries. Those incentives often align, but not always, particularly for estates below the federal exemption where basis matters more than tax.

The IRS standard of value

For estate-tax purposes, fair market value is the price at which property would change hands between a willing buyer and a willing seller, neither under compulsion to act, and both having reasonable knowledge of the relevant facts. That definition (from Rev. Rul. 59-60 and Treas. Reg. §20.2031-1) governs every estate-tax valuation question.

Rev. Rul. 59-60 also lists the factors the IRS expects a valuation to consider for closely held businesses: the nature and history of the business, the economic outlook, the book value of the stock and the financial condition of the business, the earning capacity, the dividend-paying capacity, whether the enterprise has goodwill or other intangible value, prior sales of the stock and the size of the block to be valued, and the market price of stocks of corporations engaged in the same or a similar line of business. That list is the analytical anchor for closely held estate-tax valuation.

The alternate valuation date election

The executor can elect to value estate property as of six months after death rather than at the date of death (IRC §2032). The election is binding on the entire estate, not asset-by-asset, and can only be made if it reduces both the gross estate and the federal estate tax. In practical terms, the election is most often used when asset values declined between death and the alternate date, for example when a market crash or business deterioration occurred during the six-month window.

For real estate and closely held businesses, valuing as of two different dates within the same engagement is common. The valuation expert determines value at both dates; the executor and tax counsel then decide which to use.

Discounts the IRS recognizes

For minority interests in closely held entities, the IRS recognizes (and disputes the magnitude of) two main discounts:

Lack-of-control discount (DLOC). A minority owner cannot direct the company. The discount typically ranges from 10–25% depending on the rights of the interest, the size of the minority position, and the governance environment.
Lack-of-marketability discount (DLOM). A closely held interest cannot be readily sold. Empirical studies of restricted-stock and pre-IPO transactions support marketability discounts in the 20–35% range, with significant case-specific variation.

Combined, these discounts often reduce a minority interest’s value by 30–45% from a pro-rata share of the whole. The discounts are commonly tested in IRS examinations and Tax Court litigation. The cases that win on appeal are those with thorough, fact-specific support, not those that import a generic discount from unrelated cases.

What Connelly changed

Recent authority

Connelly v. United States: entity-level cash matters.

In June 2024, the Supreme Court ruled that life-insurance proceeds owned by a closely held corporation to fund a stock redemption don’t reduce the company’s value for estate-tax purposes. The redemption obligation was matched by a corresponding asset, the cash from the policy, so the proceeds increased the company’s value. The case raised reported value of the decedent’s shares from $3M to roughly $5.3M, producing nearly $890,000 in additional estate tax. The lesson is that insurance-funded buy-sells need to be structured carefully to avoid this outcome, and date-of-death valuations need to incorporate corporate-level liquidity that was not there before.

When the estate includes real estate

Most large estates include real property. For estate-tax purposes, the property has to be valued at fair market value as of the date of death, by a qualified appraiser. The IRS examination focus is typically:

Identification of the interest. Fee simple, leased fee, leasehold, or undivided fractional interest. Each requires a different analytical framework.
Market evidence. Comparable sales, capitalization rates, and rent levels specific to the property type and location.
Family-owned LLC discounts. If the property is held in a family LLC and the decedent owned a minority interest, the IRS scrutinizes the discount support, the genuine economic purpose of the entity, and whether the structure was created or funded shortly before death.
Operating real estate. Hotels, senior housing, and special-purpose properties require going-concern analysis, not just real-estate analysis.

When a qualified appraisal is required

For most estate-tax filings, the IRS expects a qualified appraisal performed by a qualified appraiser. The qualified appraiser standards include credentialing in the relevant discipline (Certified General appraiser for real property, ABV/ASA/CVA for business valuation), and the qualified appraisal has specific content requirements under Treas. Reg. §1.170A-17 and related guidance.

For estates that may face IRS examination, the documentation requirements are higher than for estates safely within the exemption. A casual valuation that holds up for a non-taxable estate may not survive scrutiny on a Form 706 examination.

What to prepare

For a closely held business interest, expect document requests similar to other formal valuations:

Three to five years of financial statements and tax returns as of the date of death
Cap table or ownership schedule
Buy-sell, shareholder, operating, or partnership agreement
Recent transactions in the entity’s ownership
Insurance policies (especially if entity-owned, given Connelly)
Real estate inventory with separate qualified appraisals where applicable
Decedent’s estate-planning documents: will, trust, powers of attorney
Death certificate establishing the valuation date

Frequently asked

Do we need a valuation if the estate is below the federal exemption?

For tax purposes, often no. For establishing basis step-up, often yes, particularly for property-rich or business-heavy estates. The basis established at death determines capital gains exposure on later sale, which can outweigh the cost of a proper valuation for many estates.

How does the OBBBA exemption increase affect this?

The federal exemption rose to $15M per person for 2026 decedents under OBBBA. That narrows the federal-tax taxable population, but doesn’t change basis-step-up planning, state estate tax (where applicable), or any of the other reasons date-of-death valuation matters. The exemption is the floor for federal estate tax, not the ceiling for valuation work.

When should the appraiser visit the property?

For real estate, a site visit is typically expected unless the property is straightforward and the appraiser has recent comparable inspection experience. For going-concern operating businesses, management interviews are typical. The valuation expert generally documents the inspection or interview as part of the engagement.

Can we use the valuation from a recent gift to set the date-of-death basis?

No. Date-of-death value reflects facts as of that specific date, which differs from any prior valuation date. A recent gift valuation may inform the analytical approach, but the conclusion has to be derived for the death date.

How does the alternate valuation date work in practice?

If asset values dropped between the date of death and six months later, the executor may elect to value the entire estate as of the alternate date. The election is binding on the whole estate (not asset-by-asset) and only available if it reduces both the gross estate and the federal estate tax. The valuation expert typically values the relevant assets at both dates so the executor and tax counsel can decide.

Scope an estate-valuation engagement

Working with executors and trustees.

LHM works with executors, trustees, and estate counsel on date-of-death valuations involving closely held businesses, real estate, and family-owned entities. Send us the decedent’s asset summary and we’ll come back with a scope.

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