For many business owners, the company is the most valuable asset in their estate. Before that value can pass to the next generation or be documented for tax purposes, it has to be measured. An estate planning valuation determines what a business is worth for these purposes. Taking careful measures to prepare for the valuation leads to a smoother and more credible result. This article explains what an estate planning valuation involves, how to prepare for one, and when business owners are most likely to need it.
As a professional appraisal firm, Peak Business Valuation regularly helps business owners value their companies for estate and gift tax planning. Our financial analysts can prepare credible reports that support your broader estate plan. If you have any questions about how we can assist, schedule a free consultation below.
What is an Estate Planning Valuation?
An estate planning valuation is a professional appraisal that determines the fair market value of a business for use in an estate plan. Fair market value is the price the business would exchange for between a willing buyer and a willing seller, with neither under pressure to act.
When you gift ownership, or it passes to heirs at death, the IRS expects a qualified appraisal to support the value. This is a written valuation report that follows accepted standards and documents how the appraiser reached their conclusion. The estate tax valuation date also matters since an appraiser values a business as of a specific point in time. Typical options include the date of a gift or the date of death.
With a credible valuation report, you can transfer ownership with confidence, support your filings, and build the rest of your estate plan with a reliable understanding of what your business is worth.
How to Prepare Before an Estate Planning Valuation
The quality of an estate planning valuation depends heavily on the information you provide. Gathering the right records before the process begins helps the appraiser work efficiently and leads to a more credible result. Below, we outline the key items business owners should prepare in advance.
Gather Your Financial Statements and Tax Returns
The appraiser starts with your company’s financial history. To ensure a quality assessment, business owners need to provide key documents needed for a business valuation. This includes three to five years of income statements, balance sheets, and business tax returns. If your books are not current, bring them up to date before the valuation begins. This creates a reliable foundation for the entire analysis.
Organize Legal and Governing Documents
Next, business owners should gather their operating agreement, any buy-sell or shareholder agreements, articles of incorporation, and partnership documents. These records define who owns what and often contain transfer guidelines that affect value. Having them organized helps the appraiser understand how your business is structured.
Clarify the Purpose and Valuation Date
It is important to be clear about why you need the valuation, whether for a lifetime gift, an estate, or a trust. Owners should coordinate with their estate planning attorney or accountant so the valuation matches what their plan requires. Clarifying the reason for the valuation and identifying the valuation date shape the entire analysis.
Document Significant Assets and Liabilities
Finally, business owners need to make a list of what the business owns and owes. This list should include real estate, equipment, any non-operating items such as excess cash or investments, and outstanding debts. Providing a complete picture of assets and liabilities helps the appraiser reach a reliable conclusion of value.
Strong preparation makes the estate planning valuation process smoother. If you are seeking a credible estate planning valuation, it is best to work with a certified business appraiser. Peak Business Valuation regularly prepares these reports for business owners and attorneys across the country.
When is an Estate Planning Valuation Necessary?
A business owner may need an estate planning valuation at several points, not only at death. Whenever you transfer ownership of the business or need to document its value, a credible valuation is usually necessary. Below are a few common situations that call for an estate planning valuation.
- Gifting Ownership During Life: When you give a share of the business to a family member and the gift exceeds the annual exclusion of $19,000 per recipient, the instructions for form 709 call for a qualified appraisal.
- Settling an Estate: When a business owner passes away, an appraiser must value the company so the family can document the estate and properly file the required tax returns.
- Funding a Trust: Many estate plans move business interests into trusts. A valuation establishes the value of the interest at the time of the transfer.
- Succession or Buy-Sell Planning: When ownership will pass to partners, family, or key employees, a valuation supports buy-sell agreements and sets clear expectations.
- General Estate Planning: Even when no tax is owed, knowing the value of an estate helps you divide assets fairly among heirs.
In each of these situations, a credible valuation gives you and your advisors a reliable foundation to work from.
Conclusion
Preparing for an estate planning valuation does not have to be complicated. You can start by gathering your financial records, organizing your governing documents, and clarifying the purpose and timing with your advisors. This helps the process move faster and produce a more credible result. A reliable valuation gives you a clear view of what your business is worth and a solid foundation for the rest of your estate plan.
Peak Business Valuation is a professional appraisal firm that helps business owners value their companies for estate and gift tax planning. Our financial analysts prepare credible reports that support your estate plan and your filings. Schedule a free consultation with Peak Business Valuation below to get started.
