Estate and Gift Taxes

In the unfortunate event that a business owner dies, the beneficiaries of the estate must know what the fair market value of the business in order to determine their estate taxes. The IRS has created laws, found in the Internal Revenue Code, which govern business valuations for this very purpose. In addition, the IRS requires a business valuation when a business owner desires to gift an interest in their company to a friend or family member.

Hypothetical scenarios that require an expert in business valuation:

• A business owner dies, with his business being the sole asset in the estate. The business owner's son is the only beneficiary of the estate. For the son to receive the assets of the estate, estate taxes must first be paid from the estate. In order to determine the taxable amount, a qualified, independent business appraiser must be hired to derive the fair market value of the business.

• A business owner wants to do some estate planning and consequently needs to know how much his business is worth. To accomplish this task he needs to hire a qualified, independent business appraiser to determine the fair market value of the business.

• The owners of a large privately held company wish to distribute the company's shares among their five grown children.  A business valuation would be needed to determine the tax burden created by the gift. Since each child would only receive a 20% share, certain valuation discounts would be applicable which may reduce the gift tax burden.
  

• The owner of a company wishes to begin transferring some ownership to his heirs. However, the owner is concerned about maintaining control of the company. The owner decides to issue non-voting stock in the company, worth approximately 10% of the business. Since the interest to be valued is a non-voting minority interest, the discounts would be significant, which would considerably reduce the taxable value of the gift.

Special considerations for estate and gift tax valuations:

Valuations reports for estate and gift taxes are reviewed by the IRS and consequently must be thoroughly researched and have robust support for their conclusions. Valuations for estate taxes are very similar to those for gift taxes, which will generally require more research and analysis than a typical valuation report.

Special consideration should be given to the date of the valuation, which is typically the date of death or alternatively 6 months after for estate valuations, while for gift valuations it is the date of the gift. When the interest in the business is not a 100% controlling interest, valuation discounts may need to be applied.

For more information on how valuation discounts can influence a company's final value, visit our white paper library and read "How Valuation Discounts Can Protect Family Wealth."