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Why a Business Valuation is Necessary for Estate Planning

Why a Business Valuation is Necessary for Estate Planning

Most business owners have between 80-90% of their personal net worth tied up in the company they own – one highly non-liquid asset. Not only does this make estate planning difficult, but it also exposes the financial legacy you want to leave behind to your offspring at great risk. If your business is part of your estate, it would be wise to obtain a valuation. This can be done either prior to estate planning, gifting of interests, or after the death of the owner. It is important to have a plan in place for the future and begin now to develop a strategy to execute it. Even if you are not planning to exit any time soon, knowing the value of your company today will allow you to take steps to enhance your company’s value over time.

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Paying and Avoiding Estate Taxes

The value of your business has a direct relationship to the amount of tax you will owe. Either by capital gains tax resulting from a sale, gift tax on shares you have given away, or estate tax on property you own at your death. Having a current business valuation on hand can help your family handle the potential sale or dissolution of your business. The estate tax is calculated based on the Fair Market Value (FMV) of the estate’s assets at the time of the decedent’s death. A valuation is often necessary to determine the FMV of closely held securities or business interests left by the deceased. 

Whether you are planning on selling or gifting your business to your heirs, keep in mind that you might be leaving them with a large tax bill. However, there are many ways to create an estate plan with the assistance of an estate lawyer. An estate lawyer will help you identify ways for your heirs to cover taxes. They will also propose various strategies the business can implement in order to shrink the tax bill. A business valuation may be requested in order to better estimate future tax liability. The use of the valuation will influence the various strategies employed.

Gifting a Portion of the Business

Knowing the value of the business can help you and your advisors plan to reduce the estate by giving away a portion of the business while the owner is alive. Part of your estate planning strategy may be to transfer your business interest by gift. Gifts of a certain size are not subject to gift tax. In order to determine if you must pay gift tax (and, if so, how much), you need to know the value of the gift. Any time a business interest is transferred by gift, a valuation should be conducted to document the gift tax value. This also reduces the risk of the IRS changing the value of the gift upon a later audit.

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Using Life Insurance

If the estate cannot be reduced enough to avoid the estate tax, then a life insurance plan may be a good option. Having an up-to-date valuation can help you determine how much life insurance to carry, at a minimum, to cover the estate tax. 



A business valuation is an important component of estate planning. Determining the value of your business is not something you should attempt on your own. Especially given the fact that the IRS could challenge your valuation. A business valuation cannot guarantee you will go unaudited by the IRS. But it can give you peace of mind that you have proof from a qualified valuation specialist.  A profitable and growing business is likely to increase in value as time passes. So, adjustments may need to be made continually to your estate plan. You should contact a knowledgeable and experienced estate-planning attorney to help you understand how your business impacts your estate plan. We are happy to give you some references. 

Our valuation professionals, at Peak Business Valuation, have extensive knowledge of estate planning valuations. We can also help to identify ways to increase the value of your business through a valuation. We welcome any questions you may have. Feel free to reach out by scheduling a free consultation.


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