Summary
Business valuations of private companies are critical for estate planning, gifting, estate settlement, and Internal Revenue Service (IRS) reporting of estate or gift transfers. The objective of estate tax planning is to provide liquidity and continuity for private or family businesses.
Plan for Your Business Future Starting with a Certified Business Appraisal
Estate Planning Starts with Knowing Your Company’s Value
If you are a business owner, you have likely considered obtaining a business appraisal of your enterprise. A business appraisal, or business valuation, reflects the current economic value of a business. Such valuations are often conducted for various reasons, usually at the onset of a financing event within the business lifecycle.
Business valuations of private companies are critical for estate planning, gifting, estate settlement, and Internal Revenue Service (IRS) reporting of estate or gift transfers. The objective of estate tax planning is to provide liquidity and continuity for private or family businesses.
Although the approach to conducting an appraisal may vary among evaluators and industries, the factors included in such analysis tend to be the same. Overall, the financial health of a business is calculated by assessing its team, assets, earnings, growth, and losses within the context of its specific industry.
What many individuals fail to realize, however, is that obtaining a business valuation is also beneficial beyond ensuring the success of the enterprise. One particular situation in which business appraisals are helpful, for example, is for individuals executing estate planning.
Why is a business valuation needed in estate planning?
Estate planning, in and of itself, involves the process of establishing who will eventually receive one’s assets in the event of death or incapacitation.
Whether you realize it or not, you possess various assets that you will likely seek to transfer to family or employees. These assets often include cash, property, investments, and savings. But ownership interest in a business is often the most vital asset that may comprise a family’s estate.
Because your business will likely be at stake when considering one’s estate, it is crucial to obtain an expert valuation. Doing so will enable you to understand the true economic value of the asset. This is important when planning your estate so that you can effectively divide ownership interests and ensure that no one individual gets less than their fair share according to a proper assessment.
Additionally, a business valuation will be needed when planning your estate to better understand the tax liabilities that would likely apply to the transfer. Keeping tax liabilities in mind when considering the totality of your estate is helpful because it will enable you to understand which portion of your business asset would actually be received by your family once taxes are deducted.
If taxes are imposed, those taxes would likely include a gift tax or estate tax, which tends to apply toward a certain dollar amount given away in large asset transfers. Understanding these tax responsibilities and how they apply to a particular estate tends to be difficult; for this reason, it is especially vital to obtain an expert valuation while planning your estate.
While conducting an appraisal, analysts like those at BA F|G consider various factors like your business’ marketability, liquidity, and growth potential to obtain an accurate assessment of its value. Doing so might subject your business’s value to a few discounts that could lower the total value of the estate transfer and potentially exempt it from being subjected to certain tax responsibilities.
Some of the most common tax discounts that may apply to estates include Marketability Discounts and Minority Discounts.
- Marketability Discounts – These discounts apply to reduce the value of the business if the market exists at reduced size or no longer exists. This especially applies to private companies that cannot be easily sold or traded through publicly traded stocks in a marketplace.
- Minority Discounts – These discounts tend to apply when a small percentage of a company is being transferred to another individual. This is because, theoretically, a minority owner cannot impose significant decisions over majority owners to dictate the direction of the business.
Why should I obtain a business valuation sooner rather than later?
Because assets are at stake when considering one’s estate, it is crucial to obtain an expert valuation promptly. This is important to ensure that transfers do not put an excessive burden on recipients or heirs.
Additionally, planning for estate and gift transfers should be done in a proactive manner. This is because current tax laws may treat individuals and planners more favorably today than in the future. For example, The Tax Cuts and Jobs Act of 2017 still stands but expires after 2025; as a result, once the law expires, the estate and gift tax annual exemption will drop to less favorable levels from its present-day standing.
For some individuals, it may also make the most sense to transfer some, if not all, ownership of their business while still alive to children or family members. This form of gifting, which involves the transfer of ownership from one generation to another, enables business owners to reduce or bypass certain estate taxes that would have otherwise been imposed.
Regardless, if you fail to take the proper and necessary steps needed to protect your gifts and estate with real-world valuations in the present day, it may cost your heirs lots of money in the future. For these reasons, it is especially important to seek a business appraisal from experts like BA F|G to ensure that your estate retains as much of its value in the future.
Conclusion
Planning an estate is a complicated but important process. Expert qualifiers at BA F|G are eager and ready to help you determine the true worth of your most valuable assets.
Reach out to BA F|G today to discuss your particular situation and how our services will help set you, and your heirs, up for the most success.