Valuation Discounts for Estate Planning
Are you interested in learning about valuation discounts for estate planning? Transferring a business is a common part of planning for an estate. But did you know you may not have to transfer it at full value? Many business owners qualify for valuation discounts for estate planning. These discounts can lower the taxable value of a business interest. This means less tax and more wealth preserved for heirs. In this article, we explain what estate planning valuation discounts are, how they work, and why they matter for estate planning.
Peak Business Valuation is a certified business appraiser. We are happy to provide you with a business valuation to aid in your estate planning. To learn more about valuation discounts for estate planning, reach out to Peak! Schedule a free consultation today to begin your gift and estate tax valuation.
Why Business Valuation Matters in Estate Planning
For business owners, a company is likely one of their most valuable assets. Knowing what the company is worth is key to smart estate planning. A business valuation determines the fair market value of an ownership interest. Fair market value represents how much someone might pay for the share in the current market. This is important information when gifting shares or passing the business to heirs. Without a business valuation, the estate may be taxed at a higher amount than necessary. A proper business valuation helps reduce taxes and avoid disputes. It also provides a clearer picture of how to divide the estate. A professional business valuation can make estate planning smoother and more effective. For more insight, see Why a Business Valuation is Necessary for Estate Planning.
What are Valuation Discounts?
Valuation discounts for estate planning reduce the appraised value of a business interest. They reflect realistic limits that affect the fair market value of that interest. Business appraisers apply discounts when the business is transferred through a gift or inheritance. The discounts help lower the taxable value of the transfer, which means the estate may owe less in taxes.
The two most common types of valuation discounts are the lack of control discount and the lack of marketability discount. Both recognize that owning a small or hard-to-sell stake in a business is worth less than full ownership. Valuation discounts for estate planning must be supported by a professional business appraisal. When applied correctly, these discounts can offer major tax savings for families and business owners. Below, we discuss each estate planning valuation discount:
Lack of Control Discount
This valuation discount applies to minority ownership. A small ownership share has no control over decisions, making it less attractive to buyers. As a result, the share receives a lower appraisal than a controlling interest.
Lack of Marketability Discount
The lack of marketability discount reflects how hard it is to sell a private business. Unlike public stock, private shares do not sell quickly. Buyers pay less for assets they cannot easily convert to cash. This discount lowers the value for tax purposes.
Combined Discounts
In many cases, both discounts are applied. A small, hard-to-sell ownership stake may receive both a lack of control and a lack of marketability discount. When used together, they can significantly reduce the taxable value of a business interest.
When valuing a business for estate planning, business appraisers consider many relevant factors. As such, the valuation expert determines which discounts apply. For details about which valuation discounts apply to your business, contact Peak! Get started today by scheduling a free consultation.
The Role of a Qualified Business Appraiser
The IRS closely reviews business valuations used in estate planning. The business appraisal must meet IRS standards to hold up in court or during a review. Unsupported discounts may be challenged or denied. As such, it is crucial to obtain a professional business appraisal. A certified business appraiser provides detailed, well-documented valuation reports. These reports help justify valuation discounts for estate planning. They also reduce the risk of audits, penalties, or disputes. Working with a professional ensures the business valuation is accurate, defensible, and tax-efficient.
Reach out to Peak Business Valuation for access to a professional business appraiser. You can also read Obtaining a Business Valuation for Taxes to learn more.
When to Seek a Business Valuation for Estate Planning
It is best to obtain a business valuation for estate planning before transferring ownership. Common scenarios include gifting business shares, passing them on through inheritances, or setting up a trust. Using a current business appraisal ensures owners know what their business is truly worth. It also helps apply valuation discounts for estate planning correctly. Waiting too long can lead to higher estate or gift taxes. In addition, business owners should seek a valuation when creating a succession plan or when setting up a family limited partnership. Regular updates can keep the estate plan accurate and tax-efficient. Check out The Role of Business Valuation for Gift and Estate Planning to dive deeper.
Conclusion
Valuation discounts for estate planning can save business owners significant money. These discounts lower the taxable value of your business interest. However, valuation discounts must be supported by a qualified business appraisal. Proper planning and timing are essential. Obtaining a business valuation early helps avoid costly mistakes. It also gives you confidence in your estate plan. Work with a certified business appraiser to ensure accuracy and compliance. With the right guidance, you can protect your business interests and reduce taxes.
Peak Business Valuation has valued thousands of companies across the United States. We are familiar with IRS requirements and are here to help you identify applicable valuation discounts. If you have any questions about gift and estate tax valuations or want to learn more about estate planning valuation discounts, schedule a free consultation with Peak!
