How Are Stocks Valued for Estate Tax Purposes?
Estate taxes apply to almost everything that someone owns at his death. Due to the currently very high estate tax amount, very few people will ever pay any estate tax. However, it still affects most estates due to the items includable in their gross estates getting a step-up in tax basis to fair market value as of the time of death. This means if someone's house or stocks or stocks are sold the day after death, there's generally zero tax on the proceeds.
However, the sales still have to be reported to the IRS, so the basis as of death still has to be reported. Houses' values are determined through retrospective appraisals, but publicly-traded stocks are easy to value by just checking Yahoo Finance or MarketWatch. However, stocks are very volatile assets. What if someone dies during the trading day? Do you have to find the price as of the time of death? What if it's a holiday? Do you use the last closing price?
The Treasury has set forth the correct method in 26 CFR § 20.2031-2. You are to use the price halfway between the highest and lowest sales on the day the person died; or, if it was a weekend or holiday, the average of such a price for the two nearest trading days.
Example
If someone dies on a Saturday and the stock traded between $10 and $12 on Friday and $11 to $15 on Monday, you would first find the mean sale prices for the closest days:
Then you would take the average of these prices:
The open and close prices do not matter at all.
Calculator
To help with this, I have created the following tool:
Stock Mean Sales Prices Calculator
This tool will automatically pull historical price data and do the math for you for a list of stocks for a given date of death, saving you valuable time.