For families who own closely held businesses, the business interest is often the most significant asset in the estate. Whether that interest is transferred during life or at death, its value drives the estate or gift tax owed, and any valuation supporting a tax return is subject to IRS review. Business owners in the consumer and industrial products industry in particular have unique considerations in determining the value of their businesses. Understanding the basic rules, the methods appraisers use, and the planning opportunities available today can help families make more informed wealth transfer decisions.
Understanding the Basics
Applicable Valuation Dates
The applicable valuation date varies depending on the purpose of the valuation. For estate tax purposes, assets are valued as of the date of death or, if elected, the alternate valuation date. For gift tax purposes, the valuation date is the effective date when the gift is completed. In either case, the valuation should consider only information that was known or knowable as of the valuation date.
Standard of Value: Fair Market Value
Business interests transferred for estate and gift tax purposes are valued at fair market value. Under Revenue Ruling 59-60, fair market value is defined as the price at which the property would change hands between a willing buyer and a willing seller, when neither is under any compulsion to buy or sell and both have reasonable knowledge of the relevant facts.
Adequate Disclosure Requirements
Valuation also plays a central role in meeting the adequate disclosure requirements of Treasury Regulation § 301.6501(c)-1(f)(2). When a gift is adequately disclosed, the IRS generally has three years after the return is filed to assess additional tax. That limitations period can be extended to six years after the return is filed for substantial omissions. If a gift is not adequately disclosed, the limitations period may never begin, leaving the transfer open to IRS review indefinitely.
Qualified Appraisals
A qualified appraisal prepared by a qualified appraiser is one way to support adequate disclosure. A qualified appraiser regularly performs appraisals and holds themselves out to the public as an appraiser, has the qualifications to appraise the type of property being valued and is independent of the parties to the transfer. Working with an appraiser who meets these standards helps establish a well-supported value.
Three Paths to a Defensible Value
The appropriate valuation methodology depends on the facts and circumstances of each case. Appraisers generally consider three approaches: the income approach, the market approach and the cost approach.
Income Approach
The income approach determines value using one or more methods that convert anticipated economic benefits into value. Value is measured as the present worth of anticipated future net cash flows generated by a business or asset. When sufficient information is available, this is generally the preferred approach because it directly considers the company’s operations, financial performance, and future expectations. Common methods include the discounted cash flow method and the direct capitalization method. However, preparing a reasonable financial forecast can be challenging for many companies, especially those in the consumer and industrial products industry where consumer preferences and expectations may shift over time and seasonality may impact sales.
Market Approach
Under the market approach, value is determined using one or more methods that compare the subject to similar businesses, business ownership interests, securities or assets that have been sold. The guideline public company method relies on the pricing of publicly traded companies in the same or a similar line of business, while the guideline transaction method looks at sales of comparable companies.
Cost Approach
The cost approach determines value using one or more methods based on the discrete cost of reproducing specific assets and liabilities. Methods include the replacement cost method, the reproduction cost method, and the adjusted net asset value method, which restates a company’s assets and liabilities to their fair market values. This approach is generally relevant in instances where the company’s value depends heavily on the value of tangible assets and there is little or no value added from labor or intangible assets.
Special Considerations for Consumer and Industrial Products Companies
Valuing a consumer or industrial products company requires careful consideration of the conditions affecting its operations and outlook. Depending on the business, relevant factors may include demand trends, pricing pressures, customer or supplier concentration, inventory and working capital needs, supply chain conditions, capital expenditures, tariff potential, and the value of machinery, equipment, or intellectual property. These factors may influence the company’s projected cash flows and the selection of comparable companies or transactions.
Making the Most of Today’s Exemption
With the federal estate and gift tax exemption set at $15 million per individual and $30 million per married couple in 2026, families have an opportunity to take advantage of current exemption levels. Gifting now can offer several benefits. The appreciation on gifted assets escapes federal estate tax, as well as potential state estate or inheritance taxes, upon the donor’s death. The act of gifting also creates an opportunity to transfer wisdom and experience by passing financial knowledge on to the recipient. Furthermore, recipients can enjoy and use the gift now rather than waiting for the donor’s passing.
For families aiming to pass wealth to future generations, thoughtful gifting now could offer significant benefits. Still, the decision to gift substantial assets is complex and should carefully consider your financial situation, family dynamics and long-term goals.
Effective planning and expert advice are crucial to maximize the advantages of gifting while mitigating potential drawbacks. Consulting with tax, legal and financial advisors will help tailor a strategy that suits your specific needs.
Considering a gift of business interests while today’s exemption levels are in place? Talk with a CBIZ valuation professional about establishing a well-documented value for your transfer and aligning it with your broader estate plan.
Frequently Asked Questions
Estate assets are valued as of the date of death or, if elected, the alternate valuation date. Gifts are valued as of the date the gift is completed. In both cases, the valuation should reflect only information that was known or knowable as of that date..
Adequate disclosure generally limits the IRS to three years after the return is filed to assess additional tax, or six years for certain substantial omissions. Without adequate disclosure, the limitations period may never begin, leaving the gift open to IRS review indefinitely.
The federal estate and gift tax exemption is $15 million per individual and $30 million per married couple in 2026. Some states have lower exemptions under their own estate and gift tax laws, so state rules should be considered as well
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