The IRS does not allow the election simply to give heirs a different basis. The election is only permitted if it reduces both the value of the gross estate and the federal estate tax owed. Estates that owe no federal estate tax — which, for 2026, means most estates below $15 million for an individual or $30 million for a married couple using portability — cannot make the election.

The executor cannot mix and match. Once the election is made, every asset in the estate is valued as of the alternate date. If some assets have appreciated over the six months while others have declined, the net effect must still reduce the estate's total value.

If the executor sells, distributes, or otherwise transfers an asset during the six-month window, that asset is valued as of the date it left the estate, not the alternate date. This prevents an executor from holding assets that have dropped while selling those that have recovered.

Once the election is made on Form 706, the federal estate tax return, it cannot be reversed. The return is generally due nine months after the date of death, with a six-month extension available, so the decision window is not unlimited.

This is the part of the election that often catches families by surprise. When an executor elects the alternate valuation date, the heirs' cost basis is set at the alternate date value, not the date-of-death value. A lower value for estate tax purposes also means a lower step-up in basis.

If the heirs later sell the inherited assets at a higher price, they may owe capital gains tax on a larger gain than they would have if the date-of-death value had been used. The estate tax savings today can become the heirs' income tax bill tomorrow.

Consider an estate that holds 100,000 shares of a single stock. On the date of death, the stock is trading at $80, for a position worth $8 million. Six months later, the stock has dropped to $65, for a value of $6.5 million.

The estate is large enough that the $1.5 million reduction in gross estate value lowers the federal estate tax bill by approximately $600,000 at the 40% top marginal rate. By electing the alternate date, the estate saves $600,000.

Now consider what happens next. The heirs receive the stock with a basis of $65 per share. Two years later, the stock has recovered to $90 and the heirs decide to sell. The taxable gain is $25 per share, or $2.5 million across the position. At a 23.8% top federal long-term capital gains rate, that is approximately $595,000 in capital gains tax — nearly the same amount the estate saved on the front end.

Whether the election is still worth making depends on what the heirs plan to do with the inherited assets. If they expect to hold long-term, donate to charity, or hold until their own death — when a second step-up may apply — the election may still be the right choice. If they expect to sell soon after inheritance to diversify or to fund liquidity needs, the math may be much closer than the estate tax savings alone suggest.

The alternate valuation date election is a useful tool in specific circumstances. A few situations where it tends to come into play:

• Estates holding concentrated stock positions, where a single security can swing meaningfully in value over six months.
• Estates with significant real estate or closely held business interests that may be reappraised lower after a downturn.
• Estates where the date-of-death value sits close to the federal exemption threshold, and a modest decline could reduce or eliminate estate tax.
• Estates with heirs who plan to hold inherited assets long-term, reducing the future capital gains concern.

Estates with broadly diversified portfolios and heirs who plan to rebalance or sell shortly after inheritance are less likely to find the election attractive, because the future capital gains cost can offset much of the estate tax savings.

If you are serving as an executor or working with one, a few additional points are worth raising with the estate's advisors.

Not every state with its own estate tax conforms to the federal alternate valuation date. Electing the federal alternate date can create a basis mismatch between federal and state tax purposes in some states.

Heirs often do not realize the alternate valuation election affects their own future tax bill. Including them in the analysis early — particularly if they may want to sell soon after inheritance — avoids unwelcome surprises later.

Assets affected by the mere lapse of time, such as patents, life estates, and remainder interests, are still valued as of the date of death even if the alternate election is made. The rules in this area can be detailed and are worth reviewing with the estate's attorney.

The alternate valuation date is a useful planning tool, but it is not a free option. The right framework is to weigh the estate tax saved today against the income tax the heirs may owe in the future — and to make sure the family makes that tradeoff with full awareness of what is being given up on each side.

If your family is navigating estate planning decisions, working with an experienced advisor and estate planning attorney can help ensure these elections are evaluated in the context of your full financial picture. Contact us to discuss how these strategies may fit into your plan.