Southard Financial
gift tax valuation

Be an Estate Tax Hero…So Your Family Keeps More Money

Disclaimer: This article is for general information purposes only. Do not pass away thinking that this is all you need to know regarding gift and estate tax valuation. Contact your CPA or attorney for official advice before then.


Death and taxes are inevitable. They are also inseparable; when the first happens, you can be certain the second isn’t far behind.

When anyone passes away, there are always plenty of financial loose ends to tie up. However, for business owners, it can be absolutely overwhelming. That’s when you definitely want solid professionals on your side. Especially when you consider how much Estate Taxes can significantly affect property that you wish to transfer at your death.

Currently (in 2019), the IRS will apply Estate Tax rules to anyone who passes away with gross assets exceeding $11.4 million, or $22.8 million for a married couple. (Find more details from the IRS here as well as Form 706 here.)

According to the IRS, in order to determine how much those taxes will be:

“The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them…The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests, and other assets.”

Many of these values can be easily determined (cash can be counted, insurance policies show the policy amount, etc.), but things begin to get complicated when it comes to determining the value of assets that do not have a readily available market price…especially an interest in a private business.

That’s where a valuation company like Southard Financial comes into play. When a business owner realizes they have a business worth more than the estate tax exemption (or upon death), the attorney, CPA, or executor will approach us in order to do several things:

1. Establish the value of the company at the time of death.

This process is similar to the service we would provide for any other business valuation. We meet with all of the key players in the business and learn as much as we can about the company and its financials. This usually takes 4-6 weeks to complete because it’s important to get it right. The value attributable to the ownership interest at death either dictates the amount of tax owed or the value at which the interest transfers to your spouse.

2. Establish the value of transfers of company interests during life.

Business owners can transfer ownership of interests in their company to family members or trusts for their benefit during their lifetime. The total market value of the transfer made during your lifetime must be below your estate tax exemption or tax is owed on the amount above the exemption. Often, business owners gift minority ownership interests during their lifetime in order to transfer more ownership at a discounted value.

The following discounts are often applied to transfers of minority interests:

a. Minority Discount

The value of a minority interest in a business (less than 50%) is worth less per share than a controlling interest (above 50%). Discounts for minority interests decrease the value of an ownership interest to account for the lack of control inherent in the interest.

b. Lack of Marketability Discount

If you own a share of publicly traded Apple stock (making you a minority owner) and decide to sell it, it’s a pretty simple transaction with plenty of buyers available. However, if you are a minority owner in a privately held company, your stock in the business can’t be sold to just anybody. (The world of buyers for that sort of thing is pretty small, and there are usually restrictions in the shareholder agreements.) Therefore, your stock isn’t worth as much. Because you can’t immediately sell this interest, we are able to apply a lack of marketability discount to account for your lack of liquidity.

For example, a business interest that might be worth $10 million on a control basis could be worth substantially less because of the discounts applied. This is why people take advantage of gifting interests during life so that their family doesn’t have as high of a tax burden as they might otherwise.

Why a Good Estate Tax Valuation Team Matters

The IRS is well aware of the variety of discounts that can be applied to business interests owned by estates. Their job is to collect all the tax they can, and they have a specific task force that looks for improper valuations.

The IRS is known to initiate litigation over valuations of business interests on estate or gift tax returns. In fact, there are special tax courts set up just to hear these kinds of cases. And they have established guidelines to which valuators are expected to adhere.

Don’t risk leaving that much money in the hands of someone who could make costly mistakes or overlook valuable discounts. We perform dozens of Estate Tax valuations every year and have a successful track record. To learn more, contact Southard Financial online or call (901) 761-7500.

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