Lesson 15: Fair Market Value Defined

Exploring Federal Estate Tax Law fundamentals, best practices, and legal insights to navigate the complexities of Federal Estate Tax Law.

Understanding the concept of Fair Market Value (FMV) is essential when dealing with the valuation of estate assets. This lesson will explain what FMV is and how it applies to estate tax law.

What is Fair Market Value (FMV)?

Fair Market Value is the price at which property would change hands between a willing buyer and a willing seller, both having reasonable knowledge of the relevant facts and neither being under any compulsion to buy or sell.

Legal Definition

The Internal Revenue Service (IRS) defines FMV in the context of estate tax as follows:

"The fair market value is the price at which the property would change hands between a willing buyer and a willing seller when neither is under any compulsion to buy or sell and both have reasonable knowledge of the relevant facts." (Source: IRS)

FMV and Estate Valuation

When valuing an estate, it is crucial to determine the FMV of all the decedent's assets. This includes real estate, stocks, bonds, personal property, and any other assets.

Example of FMV Calculation

Let's take an example of valuing a residential property in an estate:

Determining FMV: Methods

There are several methods to determine the FMV for different types of assets. Below is a flowchart explaining the steps to determine FMV:

graph TD; A["Start"] --> B["Identify Asset Type"]; B --> C["Research Market Comparables"]; C --> D["Evaluate Conditions & Adjust"]; D --> E["Calculate FMV"]; E --> F["Document FMV"];

Key Points to Remember

  • FMV is not just the sale price but the price in an open and competitive market.
  • Both buyer and seller must be knowledgeable and free of any compulsion.
  • FMV can greatly affect the total value of an estate and the estate tax owed.

For a deeper understanding of how to value different types of assets, refer to other lessons in this series:

Conclusion

Fair Market Value is a foundational concept in the valuation of estate assets. Accurate FMV assessments ensure compliance with estate tax regulations and can significantly impact the estate's tax obligations.

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