The valuation method specified in a pecuniary funding formula determines how assets distributed “in kind” (rather than as cash) are priced for purposes of satisfying the pecuniary amount. This choice directly affects whether the estate recognizes gain or loss on funding, how much flexibility the personal representative has in selecting assets, and whether the personal representative must satisfy additional compliance requirements during distribution.
The valuation method matters only for pecuniary bequests. Fractional bequests need no revaluation because each trust receives a proportionate share of every asset, not a fixed dollar amount.
True Worth (Date of Distribution Fair Market Value)
True worth valuation prices each asset at its fair market value on the date it is distributed to the trust. If a stock is worth $100 per share at death (and receives a $100 stepped-up basis under IRC § 1014) but $120 at distribution six months later, the stock is valued at $120 for funding purposes.
- Advantages. True worth gives the personal representative maximum flexibility in picking and choosing assets. Because each asset is valued at its current market price, the personal representative can satisfy the pecuniary amount with any combination of assets, selecting the assets best suited for each trust’s purpose.
- Disadvantages. True worth triggers gain or loss recognition on funding. The $20 per share appreciation in the example above is treated as if the estate sold the stock and used the proceeds to fund the trust (the Kenan v. Commissioner rule). This gain is taxed to the estate as income. In a rising market with a long administration period, the cumulative gain can be substantial.
True worth also requires revaluing every distributed asset at the date of distribution, which is straightforward for publicly traded securities but expensive for real estate, closely held business interests, and other assets requiring formal appraisals.
Fairly Representative (Federal Estate Tax Value)
Fairly representative valuation prices assets at their federal estate tax value, which is their fair market value at the date of death (or the alternate valuation date under IRC § 2032 if elected). Because IRC § 1014 gives the assets a stepped-up basis equal to this value, they have zero built-in gain. Distributing them at their estate tax value triggers no gain or loss.
Rev. Proc. 64-19 requires that assets distributed under this method be “fairly representative” of all appreciation and depreciation in the estate. The personal representative cannot cherry-pick only appreciated assets for one trust and depreciated assets for the other. Assets distributed to each trust must reflect a fair cross-section of the estate’s overall value changes.
- Advantages. Assets valued at their basis produce no gain or loss on funding, eliminating the income tax cost that true worth creates.
- Disadvantages. The “fairly representative” requirement significantly limits the personal representative’s flexibility. The personal representative cannot engage in strategic pick-and-choose allocation; every distribution must include a proportionate mix of appreciated and depreciated assets. This is impractical when the estate contains assets that logically belong in one trust but not the other (a family business for the credit shelter trust, for example).
Fairly representative valuation also requires revaluing all estate assets (not just distributed ones) at each distribution to verify the distribution is fairly representative. This increases administrative cost and complexity.
Minimum Worth (Lesser of Estate Tax Value or Distribution Value)
Minimum worth valuation prices assets at the lesser of their federal estate tax value or their fair market value at distribution. Appreciated assets are priced at estate tax value (avoiding gain). Depreciated assets are priced at their lower current value (avoiding overfunding based on stale values).
- Advantages. Minimum worth avoids gain recognition on appreciated assets (because they are valued at basis, just like fairly representative). It also avoids the “fairly representative” requirement of Rev. Proc. 64-19, giving the personal representative more flexibility in asset selection.
- Disadvantages. Minimum worth creates an overfunding risk. Because depreciated assets are valued at their lower current value, the personal representative must distribute more assets (by original estate tax value) to satisfy the same pecuniary amount. If the estate has depreciated significantly, the pecuniary trust may receive substantially more than intended in terms of total assets.
Minimum worth can also deny loss recognition. If assets have declined in value, the estate cannot claim a loss on funding because the assets are being valued at their lower current value (not at the higher estate tax value that would produce a loss). The loss disappears.
Choosing the Right Valuation Method
The choice depends on the estate’s composition and the administration timeline:
- True worth is best when the personal representative needs maximum flexibility to allocate specific assets to specific trusts, and when the estate can absorb the income tax cost of gain recognition. It is often chosen for estates with concentrated holdings (family businesses, significant real estate) where strategic asset allocation is essential.
- Fairly representative is best when avoiding gain on funding is the top priority and the estate’s assets are relatively homogeneous (mostly publicly traded securities, for example). The ratable sharing requirement is less burdensome when the assets are fungible.
- Minimum worth is a compromise that avoids gain but maintains more flexibility than fairly representative. It works well for estates where moderate depreciation is unlikely but gain avoidance is desired. It is inappropriate for estates likely to experience significant decline in value during administration.
Many practitioners default to fairly representative for the standard estate plan, switching to true worth when the estate contains concentrated or illiquid holdings requiring strategic allocation.
To see how valuation method interacts with formula direction and bequest type, explore our comparison of all eight funding mechanisms.