August 28, 2024 •HoganTaylor
Summer often provides business owners with a unique opportunity to review their estate plans. Whether it's because your children are home from school, you're vacationing with relatives, or simply enjoying a backyard BBQ, spending time with family can prompt important discussions about your estate planning goals and how your business fits into your overall plan.
Assessing Your Business's Current Value
Before diving into a family discussion, it's crucial to understand the current value of your business. Market conditions can be unpredictable, and the value of your business may not align with your expectations. Knowing its worth now can help you make informed decisions and set realistic goals for your estate plan.
The Urgency of Timing: The Gift and Estate Tax Exemption
A critical reason to act soon is the pending expiration of the generous federal gift and estate tax exemption. For 2024, the lifetime exemption stands at $13.61 million (effectively doubled for married couples). This amount will be adjusted for inflation in 2025. However, starting January 1, 2026, the exemption is scheduled to revert to an inflation-adjusted $5 million, projected to be around $7 million or $8 million. Given these potential changes, it might be wise to transfer ownership interests while the higher exemption is still in effect.
The Importance of Knowing Your Business's Value
Understanding the value of your business is essential for developing a long-term strategy for wealth transfer. The value determines how much can be transferred to loved ones without incurring significant gift or estate taxes. For these purposes, the standard of value is fair market value, as defined by the IRS.
It's strongly advised against performing valuations yourself. Hiring a "qualified appraiser" is crucial to demonstrate good faith when filing gift or estate tax returns. Qualified appraisers have specific credentials and experience, ensuring an accurate and defensible valuation.
Key Factors in Business Valuation
Valuing shares of closely held businesses can be complex, as they aren't publicly traded. Valuators rely on IRS Revenue Ruling 59-60, which outlines eight key factors to consider:
- The nature and history of the business
- The outlook for the industry and economy
- The business's book value and financial condition
- The earnings capacity of the business
- Dividend-paying history or ability
- The value of goodwill and other intangible assets
- Prior sales of the business’s shares and the size of the block
- Prices paid in comparable transactions
Additionally, certain ownership interests may qualify for discounts for lack of control and marketability. Valuation experts use empirical data rather than subjective measures to ensure a fair assessment.
The Value of Proactive Gifting
Businesses typically increase in value over time, making it advantageous to gift shares to loved ones sooner rather than later. For instance, a stock valued at $100 per share today could be worth approximately $163 in 10 years or $265 in 20 years, assuming a 5% annual growth rate. Proactive gifting strategies allow you to transfer business interests during your lifetime, potentially minimizing your estate tax exposure. Notably, IRS regulations prevent lifetime gifts from being "clawed back" into your estate if the exemption decreases upon your death. A qualified business appraisal can help maximize the exemption amount used up before the expanded exemption limit is scheduled to expire in 2016.
Staying Informed and Prepared
It's essential to regularly monitor your business's value and consult with your estate planning professional. Future changes in estate tax laws could affect the lifetime exemption, estate tax rates, or even the existence of the estate tax. We can help you navigate these uncertainties and prepare for a variety of scenarios.
How HoganTaylor Can Help
If you have any questions about this content, or if you would like more information about HoganTaylor’s Forensic, Valuation & Litigation Support practice, please contact Clay Glasgow, CPA, ABV, CFF, CFE , Advisory Partner.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.
Get Updates
