Key Takeaways

• Business valuation is a critical component for accurate estate planning and lifetime gifting strategies.
• A well-documented, independent valuation supports IRS compliance and reduces audit risk.
• Gifting business interests can minimize estate taxes and transfer wealth efficiently.
• Discounts like lack of control and marketability may reduce taxable value when properly supported.
• Coordination among CPAs, attorneys, and valuation professionals is key to success.

In today’s landscape of wealth preservation and intergenerational planning, estate and gifting valuation is more than a financial technicality—it’s a foundational element of responsible legacy management. For families who own businesses, accurate and IRS-compliant valuations are critically important for successful estate planning and tax-efficient gifting.

A business is often the most valuable asset in a family’s portfolio, yet it is also the most complex to transfer. Missteps in valuation can lead to IRS penalties, family disputes, and missed opportunities for tax savings. That’s why aligning estate planning with precise business valuation isn’t just smart—it’s a key risk-management consideration.

What is Business Valuation in the Context of Estate Planning?

Business valuation for estate planning refers to the professional process of determining the fair market value of a business or business interest. For federal estate and gift tax purposes, fair market value is determined under IRS Revenue Ruling 59-60 and related Treasury Regulations. This becomes critical when assets are transferred through gifts or after death. A defensible valuation ensures:

• Compliance with IRS valuation guidelines
• Equitable distribution among heirs
• Strategic gifting to reduce estate tax liabilities
• Avoidance of legal disputes

A thorough valuation provides a clear picture of your business’s worth, which is pivotal for informed decisions and future security. These valuations assume a hypothetical willing buyer and willing seller, rather than specific family members or known parties. Without this foundation, estate planning efforts can quickly become unstable and vulnerable to legal and financial challenges.

The Strategic Importance of Valuation in Gifting

Why Gifting Business Interests Matters

Gifting is a powerful way to pass wealth to future generations while minimizing estate tax. However, the IRS requires that all gifted interests—especially those in closely held businesses—be valued appropriately at the time of transfer.

This valuation serves as the basis for gift tax reporting and ensures that the value of the gift is fairly assessed. Families who plan ahead can use gifting to gradually reduce the size of their taxable estate while also introducing heirs to business ownership. In practice, these valuations should be prepared by a qualified, independent appraiser.

Common Gifting Scenarios

• Gifting shares to children to reduce the size of the taxable estate
• Transferring interests to a Grantor Retained Annuity Trust (GRAT)
• Using annual gift tax exclusions or lifetime exemption

In these scenarios, the valuation directly influences the tax impact. For example, applying valuation discounts (like lack of control or marketability) can significantly reduce the taxable value of the gifted interest—making gifting strategies more tax-efficient and impactful. These discounts are highly fact-specific and are not automatic; they must be supported by company-specific analysis and market data.

IRS Compliance and Risk Mitigation

Understanding IRS Scrutiny

The IRS pays close attention to valuations related to estate and gift tax. Non-compliant or unsupported valuations can result in audits, penalties, or revaluation at higher amounts—often increasing tax liabilities.

To ensure IRS valuation compliance, your valuation should:

• Be performed by a qualified, independent appraiser
• Follow USPAP and IRS Revenue Ruling 59-60 standards
• Be well-documented and defendable in court

Choosing a qualified professional ensures the valuation holds up under scrutiny and offers peace of mind that all compliance standards have been met.

What Happens When Valuations Are Inaccurate?

• Disallowed gift exclusions
• Higher-than-expected estate taxes
• Costly legal disputes among heirs or beneficiaries

Inaccurate or poorly documented valuations can derail even the most well-intentioned estate plans. In some cases, families have seen substantial tax penalties simply because the valuation wasn’t detailed or objective enough. A professional valuation mitigates these risks and helps maintain the integrity of your legacy.

Discounts and Adjustments in Gifting Valuations

To ensure tax efficiency, valuations often apply specific discounts:

Lack of Control Discount (LOC)

Applied when minority interest in the business is transferred, reducing the value due to lack of decision-making power. The applicability and magnitude of this discount depend on the specific rights conveyed and the governing documents of the business.

Valuation professionals may apply a discount on the fair market value, which is commonly accepted by the IRS when properly documented and supported with credible data.

Lack of Marketability Discount (LOM)

Reflects the difficulty in selling a privately held business interest.

Because there’s no active market for private business shares, they’re harder to sell. A well-supported marketability discount considers factors such as transfer restrictions, holding period, and dividend policies.

Together, these discounts can significantly reduce the reportable value of the gift—enhancing tax efficiency. However, they must be applied judiciously and backed with credible market data and professional judgment to withstand IRS challenge.

When Should Families Seek a Valuation?

Key Triggers

• Approaching retirement or succession planning
• Initiating a gifting strategy
• Estate planning reviews
• Ownership restructuring

Valuation should not be seen as a one-time event. As businesses grow and markets shift, valuations should be updated to reflect current realities. Regular valuations allow families to make informed decisions and help ensure valuations reflect the most current business performance and market conditions, which is especially important for gifts or estate transfers subject to IRS scrutiny.

Role of Advisors: CPAs, Attorneys, and Wealth Managers

Successful estate and gifting strategies are multidisciplinary. Each advisor plays a critical role:

• CPAs: Ensure tax optimization and compliance by integrating valuation into broader financial planning and tax filings.
• Estate Attorneys: Draft trusts and legal documents aligned with valuation figures to ensure smooth legal transfer of ownership.
• Wealth Managers: Plan wealth transfer strategies based on business value and help balance family dynamics and financial goals.

These advisors rely on accurate valuations to deliver effective advice. Their coordinated efforts, anchored by a professional valuation, can safeguard wealth across generations.

Why Choose a Professional Valuation Firm like BGH Valuation?

At BGH Valuation, we specialize in valuations for estate and gifting purposes. Our process is rigorous, transparent, and designed to stand up to IRS scrutiny. Here’s what sets us apart:

• Decades of experience in business valuations
• Deep understanding of tax and legal frameworks
• Custom reports tailored for estate planning needs
• Strong track record of working with families and advisors
• Transparent documentation to support valuation discounts

Our experts are not just technicians; they are partners in your planning process. We work closely with your advisors to ensure that your business valuation supports your family’s goals and withstands IRS examination.

Make Informed, Strategic Decisions

Estate and gifting strategies are only as effective as the valuations that support them. A well-executed business valuation does more than meet IRS requirements—it empowers families to transfer wealth thoughtfully and sustainably.

Business valuation is not just a financial checkbox—it’s a strategic tool that ensures your intentions are realized, your taxes are minimized, and your family legacy is preserved.

Whether you’re beginning your estate plan, gifting interests to children, or managing a large estate, the time to get a professional valuation is now. Work with experienced professionals to ensure compliance, peace of mind, and a legacy that lasts.

FAQs

1. What documentation is required for a valuation to be IRS-compliant?

A professional valuation report should follow IRS Revenue Ruling 59-60, include financial analysis, explain methodologies, and be prepared by a qualified appraiser.

2. How often should a business be revalued for estate or gifting purposes?

Businesses should be revalued with any major financial event (e.g., growth, downturns, ownership changes) or prior to gifts or estate transfers, or every 1–3 years during active estate planning.

3. Can valuation discounts really make a difference in taxes?

Yes, when properly applied, valuation discounts can reduce the reportable value of gifted interests and potentially lead to tax savings, depending on the overall structure of the estate plan and IRS review.