The federal estate tax is levied on the property owned by decedents (dee-CEE-dents) at the time of death. It is paid by the estate for the privilege of passing property on to recipients, who are called donees (doh-NEES). The tax is based on the fair market value of the property on the date of death or on an alternate valuation date. When people die, all assets they own are listed by their fair market value, usually by appraisal, by the person, most likely the executor (ig-ZEHK-you-ter) of the will or trustee of the living trust, who files the federal estate tax return. The determination of fair market value is generally made as of the date of death. There’s an alternative valuation date of six months after death available for estates that have decreased in value. As a corollary to this rule, the tax basis of the decedent's property is stepped-up to the estate tax value. Tax basis refers to the value of the property for computing gain or loss. It’s usually the cost of the property plus improvements and less any depreciation. For example, if the decedent dies owning stock that had been purchased for $5 (five dollars), but has a current value of $100 (one hundred dollars), the full $100 value, which is called the stepped-up basis, is used to determine the estate tax. Income tax will be paid by the donee only on the sale of stock for an amount in excess of $100.
