Assessing Value at Death
Generally, the value of an asset must be established as of the date of the decedent's passing. This Value at Death is crucial for calculating estate taxes and determining tax obligations when an asset is eventually sold, either by the estate or the heirs.
Adjusted Cost Base (ACB) Considerations
Additionally, the adjusted cost base (ACB) of any capital asset must be determined. This is the amount the decedent initially paid to acquire the asset, which is necessary for calculating deemed proceeds on the decedent's final tax return.
While you can refer to the ACB section for essential valuation rules, in general, the decedent's records might reveal the asset's ACB. If the original acquisition date is known, you can potentially use the valuation resources listed below to determine the initial acquisition cost. Keep in mind that the original ACB of a registered retirement account is considered $0.
As deemed proceeds for personal use items, such as motor vehicles or furniture, cannot be negative, researching their original purchase prices is unnecessary, unless their value has significantly increased – a rarity for personal use items that typically depreciate as they are used. Thus, the ACB of such an asset can effectively be considered its current value, with the deemed proceeds being $0.
Evaluating Value at Disposition
Lastly, the asset value must be determined at the time of sale or distribution, as estates often take months or even years to settle, and asset values can change, sometimes drastically, during this period.
Value at Disposition is employed to calculate estate income taxes if the asset was sold and to properly allocate assets to heirs based on estate value percentage targets if the asset is distributed instead.
Definition and importance of FMV
Fair Market Value (FMV) is the price at which an asset would change hands between a willing buyer and a willing seller, having reasonable knowledge of the relevant facts and neither being under any compulsion to buy or sell. In the context of probate and deemed disposition of assets, determining the FMV of each asset is crucial for accurate tax reporting and proper distribution of the estate.
For example, imagine a deceased individual owned a classic car. If the FMV of the car is not accurately determined, it could lead to either an overpayment or underpayment of taxes, and the beneficiaries may not receive their fair share of the estate or the executor may be on the hook for the underpayment of estate taxes.