Business Valuations for Estate Planning, Wealth Transfer, and IRS Gifting

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 when transferring business ownership.

Plan for Your Business Future, Starting with a Certified Business Appraisal for Ownership Transfer.

Transfer business ownership to a family member, starting with a business valuation

Transfer Business Ownership to a Family Member

Estate Planning Starts with Knowing Your Company’s Value

If you are a business owner, you have considered obtaining a business appraisal of your enterprise. A business appraisal, or business valuation, reflects the current economic value of a business. Business owners conduct such valuations for various reasons, including transfer ownership, usually at the onset of a financing event within the business lifecycle. There are many ways to transfer ownership, which we will discuss.

A family-owned business can have many family members to deal with when transferring ownership, both active and passive. Some are active in the family business, some passive, some want out, and others want to be involved in the industry, all at different stages and skill sets in their life. This can make a succession plan (and Thanksgiving dinner) difficult.

The cost of an estate tax valuation

You can also read how much a business valuation costs from a small business sole proprietorship to a large C corporation or limited liability company.

Note: your operating agreement and articles of organization should reference a business valuation under all the circumstances of a business transfer ownership, sale, or buyout. When you sell the business, there is only one exit possibility. Even a sole proprietorship should have an operating agreement.

Business valuations of private companies are critical for many reasons. These reasons include estate planning, gifting, estate settlement, and Internal Revenue Service (IRS) reporting of estate or gift transfers. Estate tax planning aims to provide liquidity and continuity for private or family businesses. It does this by determining your business’s fair market value in the eyes of taxing authorities in the form of a business valuation report.

Business valuation for the transfer of a Family Business to the Next Generation

The appraisal approach may vary among evaluators and industries. However, the factors included in such analysis tend to be the same in a valuation for transfer business ownership. Overall, we calculate a business’s financial health by assessing its team, assets, earnings, growth, and losses within the context of its specific industry for your succession plan.

What many individuals fail to realize, however, is that obtaining a business valuation is also beneficial beyond ensuring the success of the enterprise. One situation in which business appraisals are helpful, for example, is for individuals executing estate planning for gift and estate tax.

You can also read the important role of business valuation in exit planning and transferring your family business to the next generation or ownership of a business to your employees. You can also ensure that the capital gains are minimized when looking at personal goodwill versus business goodwill. This is critical when transferring a family business to the next generation.

Why is a business valuation needed in estate planning?

Estate planning involves establishing who will eventually receive one’s assets in the event of death or incapacitation. A business appraisal can help with the transfer of the business part.

Whether you realize it or not, you possess various assets that you will seek to transfer to family or employees. These assets often include cash, property, investments, and savings. However, ownership interest in a business is usually the most vital asset that may comprise a family’s estate.

Please read the business appraisal for estate planning in a family-owned business for succession planning.

A Family Business valuation, whether a sole proprietorship or a C corporation.

Because your business will be at stake when considering one’s estate, it is crucial to obtain an expert valuation. Doing so will enable you to understand the actual economic value of the asset. This is important when planning your estate. Why? Because it effectively divides ownership interests. Also, it ensures that no individual gets less than their fair share according to a proper assessment, no matter the type of business or business structure.

Transfer a family business to the Next Generation succession plan

Transferring your business to family members can be tricky. The IRS will pay close attention to the fair market value used and that no additional taxes are owed.

Additionally, you will need a business valuation when planning your estate. This is to understand better the tax liabilities that would apply to the transfer. Keeping tax liabilities in mind when considering the totality of your estate is helpful. How so? It will enable you to understand which portion of your family’s business assets will receive after taxes.

You can also read What You Need to Know about the IRS Business Valuation Guidelines when you sell the business to a new owner or the business to a family member. The board of directors needs to understand their fiduciary duties and liabilities in the operating agreement and the articles of organization.

Taxes and Your Business Valuation

If taxes are imposed, they would include a gift tax or estate tax for the business owner. This tends to apply to a specific dollar amount given away in large asset transfers. Understanding these tax responsibilities and their application to a particular estate is complex. For this reason, obtaining an expert valuation while planning your estate is especially vital if you transfer a family business.

While conducting an appraisal, analysts like those at BA FL|GA|HI consider various factors. These include your business’s marketability, liquidity, and growth potential to assess its value accurately. Doing so might subject your business’s value to a few discounts. These could then lower the total value of the estate transfer.

It could also exempt it from certain tax responsibilities when transferring your business to someone else.

Common Business Valuation Discounts

Two of the most common valuation discounts or tax discounts that may apply to estates include Marketability Discounts and Minority Discounts.

1. Marketability Discounts—These discounts reduce the business’s value if the market is reduced or no longer exists. This especially applies to private companies, where you cannot quickly sell or trade through publicly traded stocks in a marketplace like public companies. One must carefully apply the discount for lack of marketability or DLOM and with good documentation and reasoning for closely held businesses. If you have restricted shares, you must also take that into account.

1. Minority Discounts – These discounts 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. The discount for minority interest or discount for lack of control (DLOC) should be well-researched, with backup documentation that meets IRS standards.

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 burden recipients or heirs excessively. Does your operating agreement or buy-sell agreement cover all contingencies? When you transfer business ownership, will you need a small business loan or owner financing to fund the transaction?

Additionally, planning for estate and gift transfers should be done proactively. 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 annual exemption for the estate and gift tax will drop to less favorable levels than its present-day standing for estate and gift taxes.

Always be ready to change ownership, whether planned or unplanned. An estate tax valuation is critical to minimizing wealth erosion when you transfer the business. Your type of business can play a crucial role, too. For example, if you need special licensing or bonding, this narrows the transferees and business structure.

When Should You Transfer Your Company to Family Members?

It may also make the most sense for some individuals to transfer some if not all, ownership of their business while still alive to children, family members, or family limited partnerships. This form of gifting involves the transfer of ownership from one generation to another. It enables business owners to reduce or bypass certain estate taxes that would have otherwise been imposed. Transferring your business to the next generation requires valuation, tax, and financial planning.

Transferring business ownership to a Family member

Regardless, if you fail to take the proper steps to protect your gifts and estate with real-world valuations in the present day, it may cost your heirs money in the future. For these reasons, seeking a business appraisal from experts like BA FL|GA|HI is especially important. This ensures that your estate retains as much of its value in the future as you transfer ownership.

Estate Planning Business Valuation Conclusion

Planning an estate is a complicated but essential process. The expert valuers at BA FL|GA|HI are eager and ready to help you determine the true worth of your most valuable assets and how best to execute succession planning and transfer family business ownership.

We will fairly value your business based on the precepts of a willing buyer and a willing seller, both with reasonable knowledge of relevant facts that change hands in the eyes of the IRS for estate tax purposes. Let’s keep you out of the tax court and simplify estate planning purposes.

Reach out to BA FL|GA|HI today to discuss your situation and the value of the business. Find out how our services will help set you and your heirs up for the most success for gift tax purposes or to transfer business ownership to a family member.

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