An estate is valued for tax purposes by adding up the fair market value of every asset the decedent owned on the date of death, then subtracting allowed deductions to arrive at the taxable estate. That figure determines whether federal or state estate tax is owed and sets the cost basis heirs inherit when they later sell what they receive. For deaths in 2026, only the portion of an estate above the $15,000,000 federal exemption is subject to federal estate tax, but the valuation still matters for every estate because it drives state tax liability, the heirs’ future capital gains, and the executor’s exposure to IRS penalties.1Internal Revenue Service. What’s New — Estate and Gift Tax
What Goes Into the Gross Estate
The gross estate captures every financial interest the decedent held, not just assets with a title or deed. Real property usually leads the list: the primary home, vacation property, rental buildings, undeveloped land. Financial accounts follow, including checking and savings balances, certificates of deposit, brokerage holdings, and retirement accounts like 401(k) plans and IRAs. Retirement accounts still count toward the gross estate even when they pass directly to a named beneficiary outside probate.
Tangible personal property belongs in the inventory too: vehicles, furniture, jewelry, artwork, collectibles. Intangible holdings round out the picture, including digital assets, cryptocurrency, and intellectual property such as patents or royalties. Business interests deserve special attention. An ownership stake in a closely held corporation or LLC can be the single hardest asset to price in the entire estate, and undervaluing it is one of the fastest ways to draw IRS scrutiny.
Life Insurance
Life insurance proceeds are included in the gross estate when the decedent held any “incidents of ownership” over the policy at death, meaning the right to change beneficiaries, borrow against the policy, or cancel it.2Office of the Law Revision Counsel. 26 USC 2042 – Proceeds of Life Insurance A policy naming someone other than the estate as beneficiary still gets pulled into the gross estate if the decedent kept those ownership rights. The insurance company completes IRS Form 712 to document the policy’s value, and the executor attaches that form to the estate tax return.3Internal Revenue Service. About Form 712, Life Insurance Statement Policies held inside an irrevocable life insurance trust generally avoid estate inclusion.
The Fair Market Value Standard
Every asset must be priced at fair market value, which federal regulations define as the price a willing buyer would pay a willing seller when neither is under pressure to complete the deal and both have reasonable knowledge of the relevant facts.4eCFR. 26 CFR 20.2031-1 – Definition of Gross Estate; Valuation of Property The benchmark is the date of death. A stock portfolio is valued using closing prices on that exact trading day. Real property is appraised based on comparable sales and market conditions as of that date.
That standard is easy to apply to publicly traded securities and much harder for assets without a visible market price. A family-owned business, a rare painting, or mineral rights under farmland all require judgment calls. The IRS devotes significant audit resources to challenging valuations it considers too low, particularly for closely held businesses and large real estate holdings.
Alternate Valuation Date
The executor can elect to value the entire estate as of a date six months after death instead of the date of death itself. This option is available only when it reduces both the total gross estate and the resulting tax bill.5Office of the Law Revision Counsel. 26 USC 2032 – Alternate Valuation If any asset is sold or distributed before the six-month mark, the value on the date of that transaction applies to that particular asset. The election is all-or-nothing; the executor cannot pick the alternate date for some assets and the date-of-death value for others.
The provision helps when markets drop sharply in the months after a death. The trade-off is that the lower valuation also becomes the heir’s tax basis, which can increase capital gains taxes if the asset rebounds and is later sold.
Deductions That Reduce the Taxable Estate
The gross estate is not the taxable estate. Federal law allows four core categories of deductions: funeral expenses, administration costs (executor fees, attorney fees, court costs), debts owed by the decedent, and unpaid mortgages on property already counted in the gross estate at full value.6Office of the Law Revision Counsel. 26 USC 2053 – Expenses, Indebtedness, and Taxes Charitable bequests and property passing to a surviving spouse also qualify for their own deductions under separate code provisions.
These deductions matter even for estates well below the federal exemption because state estate taxes often kick in at much lower thresholds. The executor should keep detailed receipts for every expense claimed; the IRS can disallow deductions that lack supporting documentation.
Why the Valuation Matters to Heirs
The cost basis of inherited property resets to its fair market value on the date of the decedent’s death, or to the alternate valuation date if that election is made on the estate tax return.7Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent This “step-up in basis” can eliminate decades of accumulated capital gains for a beneficiary who later sells inherited property. The accuracy of the estate valuation directly controls how much tax the heirs pay years down the road, which gives beneficiaries a strong reason to insist the valuation reflect true fair market value rather than a lowball figure.
Not every inherited asset qualifies. Retirement accounts like IRAs and 401(k)s, annuities, and U.S. Savings Bonds are treated as “income in respect of a decedent” and do not receive a step-up. The beneficiary pays income tax on distributions from those accounts just as the original owner would have.
The 2026 Federal Exemption and Portability
The One Big Beautiful Bill Act, signed on July 4, 2025, set the basic exclusion amount at $15,000,000 per person starting January 1, 2026, with inflation adjustments beginning in 2027.1Internal Revenue Service. What’s New — Estate and Gift Tax Only the value above that threshold is subject to federal estate tax, which reaches a top rate of 40 percent.
When the first spouse dies without using the full exemption, the surviving spouse can claim the leftover amount, known as the deceased spousal unused exclusion (DSUE).8Office of the Law Revision Counsel. 26 USC 2010 – Unified Credit Against Estate Tax A married couple can effectively shelter up to $30 million from federal estate tax this way, but the executor of the first spouse’s estate must file Form 706 and make the portability election, even if the estate is far below the filing threshold and owes no tax.9Internal Revenue Service. Instructions for Form 706 Skipping this step forfeits the unused exemption permanently. Executors who missed the deadline can request a late portability election by filing Form 706 within five years of the decedent’s death.
State estate taxes are a separate matter. Roughly a dozen states and the District of Columbia impose their own estate taxes, often with exemptions far below the federal level, ranging from as low as $1 million in some states to the full federal amount in others. An estate that owes nothing to the IRS may still face a substantial state estate tax bill depending on where the decedent lived.
Documentation and Appraisals
A defensible valuation starts with organized paperwork. Executors should gather recent bank and brokerage statements, life insurance policy documents, retirement account statements, property deeds, and current local tax assessments for real estate. For unique or hard-to-price assets like antiques, artwork, closely held businesses, or unusual real property, a professional appraisal is the standard approach.
Appraisal costs vary. A residential appraisal might run a few hundred dollars, while a full business valuation for a closely held company can cost from several thousand to tens of thousands of dollars, depending on complexity. IRS examiners give more weight to appraisals that follow the Uniform Standards of Professional Appraisal Practice, so choosing an appraiser with recognized credentials and estate experience is worth the extra cost.
Most probate courts provide standardized inventory forms requiring a description of each asset alongside its fair market value. These forms become part of the official court record and serve as the legal basis for distributing the estate. An asset left off the inventory can delay the entire probate process and create liability for the executor.
Penalties for Undervaluing Assets
The IRS imposes an accuracy-related penalty when an estate significantly understates an asset’s value on its return. A “substantial” understatement occurs when the reported value is 65 percent or less of the correct value, and the penalty is 20 percent of the resulting tax underpayment.10Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments If the reported value drops to 40 percent or less of the correct amount, the IRS treats it as a “gross valuation misstatement” and doubles the penalty to 40 percent of the underpayment.
These penalties can be waived if the executor demonstrates reasonable cause and good faith, but that defense is hard to win when the estate used no appraisal or relied on an unqualified appraiser. Lowballing a valuation to reduce estate tax also hands beneficiaries a lower stepped-up basis, which can increase their capital gains tax later and cost the family more in total taxes than it saves.
Filing the Estate Tax Return
Estates with a gross value above $15,000,000 must file IRS Form 706, the United States Estate (and Generation-Skipping Transfer) Tax Return.11Internal Revenue Service. Frequently Asked Questions on Estate Taxes The deadline is nine months after the date of death. An automatic six-month extension is available by filing Form 4768 before the original deadline, giving the executor up to fifteen months total.12Internal Revenue Service. About Form 4768, Application for Extension of Time To File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes The extension covers the filing deadline only; interest on any tax owed still accrues from the nine-month mark.
Separately, the executor files an inventory with the local probate court listing every asset and its value. After the court reviews the inventory, a judge issues an order approving it, authorizing the executor to begin distributing assets. Even for estates that fall well below the federal filing threshold, the fair market value established at death becomes the beneficiaries’ tax basis under the step-up rules, so documenting values carefully pays off long after probate closes.