Why Your Business Value Matters in Estate Planning and Wealth Transfer

ARTICLE | July 11, 2024

Proper estate planning is crucial for individuals with significant assets, particularly for business owners. One critical aspect of this process is business valuation, which plays an essential role in formulating a strategic approach to wealth transfer, minimizing estate taxes, and ensuring a fair division of assets. As such, understanding the current worth of your business is a fundamental part of estate planning.

Business valuation is the process of determining the economic value of a business or an ownership interest. The valuation provides an accurate and detailed snapshot of a company’s worth at a particular date, aiding stakeholders in making informed decisions. This valuation is not limited to a company's bank account or physical assets, but includes an assessment of factors such as marketability, liquidity, and reputation. 

In the context of estate planning, a business valuation is crucial for two primary reasons. First, it allows for the proper division of interests among family members or heirs, ensuring a fair distribution based on the owner's assessment. Secondly, it enables the understanding of potential tax liabilities associated with the transfer, providing a clear picture of the assets that would be received by the heirs after tax deductions. 

Existing tax laws, like the Tax Cuts and Jobs Act (TCJA) of 2017, provide an exemption limit for large asset transfers during one's life or estate received by heirs after death, known as the basic exclusion amount (BEA). As of 2019, the BEA stands at $11.4 million, meaning that if your gift or estate planning includes assets that fall under this threshold, they will be exempted from taxes. However, if the total amount of given interests exceeds $11.4 million, the exceeding amount will be subject to gift tax and estate tax. 

One important aspect to consider is the potential for discounts in business valuation. These discounts can significantly lower the total value of your business transfer, keeping it from exceeding the BEA threshold. Factors such as marketability, minority ownership interest, and key person discounts could reduce the overall valuation of your business. This is particularly relevant in the current economic environment, where reduced financial performance and market volatility may further enhance the potential for valuation discounts.

Timely business valuation allows for accurate transfers of business interests and avoids excessive burdens on the recipients or heirs. Procrastination in obtaining a business valuation may result in significant financial costs to the heirs. Moreover, the current economic climate presents a unique opportunity to obtain a favorable business valuation, making it an advantageous time for business owners to consider this process. 

It's important to note that accurate business valuation requires the expertise of professional business appraisers who understand the nuances of the process. They can provide accurate advice on valuing a business for estate planning and gift purposes, ensuring compliance with tax laws and regulations.

In conclusion, business valuation is a critical element in estate planning, particularly for business owners. It provides an accurate representation of a company's value, helps in the fair distribution of assets, and aids in understanding potential tax liabilities. Given the current economic climate, business owners have a unique opportunity to take advantage of valuation discounts, making it an ideal time to consider this process as part of their estate planning strategy. 

Remember, estate planning is not a one-time event but a dynamic process that should be revisited regularly, especially when significant changes occur in your business or personal circumstances. Always consider seeking advice from a team of experts, including an estate planning attorney, a CPA, and a professional business appraiser, to ensure that your estate plan aligns with your overall financial goals.