Gift & Estate Tax Valuation – Everything you should know

Valuation is important for structuring the transfer of business ownership to the next generation or key employees. By gifting business interests now, owners can remove future appreciation from their taxable estate, potentially saving millions in estate taxes.

Current lifetime gift and estate tax exemption is at an all-time high of $13.71 million for individuals and $27.22 million for married couples. However, these amounts are set to decrease after 2025. Business owners should view this as an opportunity to take advantage of the current exemptions.

You can make informed decisions about wealth transfer, minimize tax liabilities, and ensure their legacy planning aligns with both personal and business objectives by considering Gift and estate Tax Valuation. As a founder or owner, you should know the current tax landscape and the changes approaching 2026 so that owners can engage in this type of planning.

Understanding Gift & Estate Tax Valuation 

In essence, gift and estate tax valuation means identifying the fair market value of assets that can be subject to taxation by the government. Usually, there is a provision of a certain tax levied based on valuation. The valuation of property must be calculated to file gift and estate tax returns. Since valuation involves determining the fair market value of an asset, it is equated with the price of an investment for sale.

In other words, it is the theoretical amount at which the property could be sold on the open market, factoring in all the costs of selling the asset. Thus, gift and estate tax valuation is the process of determining the value of an asset and deciding on the taxes to be levied on that value.

Accurate valuations are crucial for IRS compliance and to avoid audits. Working with valuation experts helps create well-documented, defensible valuations that withstand IRS scrutiny.

What are gift and estate taxes?

Gift and estate taxes are taxes levied on the transfer of property. Though they are two separate taxes, they often get lumped together under the term estate taxes. Both gift tax and estate tax involve the transfer of assets. Gift tax applies to transfers made during a person’s lifetime, while estate tax applies to transfers upon death.

When an individual transfers assets, various taxes may apply depending on the jurisdiction and the nature of the transfer. Understanding these taxes is crucial for effective estate planning and ensuring compliance with local laws regarding asset transfers upon death or as gifts during one’s lifetime.

• Gift Tax – A gift tax is a federal tax imposed by the IRS, transferring money or property from one individual to another without receiving anything of substantial value. It is designed to prevent individuals from denying estate taxes by giving away their wealth before death. In many jurisdictions, annual exclusions exist (e.g., in the US, gifts below $17,000 per recipient per year are not subject to gift tax) and lifetime exemptions that can reduce or eliminate gift tax liability.
• Estate Tax –  Estate tax is a federal tax imposed on transferring an individual’s estate when they pass away. The federal estate tax in the US applies only to estates exceeding a certain exemption threshold (currently $13.61 million in 2024), rates ranging from 18% to 40%, depending on the amount exceeding this threshold..
• Inheritance Tax – The state imposes an inheritance tax on individuals inheriting assets from a deceased person’s estate. The tax is based on the value of the inheritance received. In the US, they depend on the amount inherited and the relationship to the decedent, starting from 10% and going up to 18%.

Gift and Estate Tax Planning Strategies

Business owners should consider gift and estate tax valuation for several important reasons:

• Maximize Tax Savings – Proper valuation can allow for discounts and minority interest. These can reduce the taxable value of business interests, allowing owners to transfer more wealth tax-free.
• Estate Planning – Valuation helps owners to transfer portions of the business to heirs or successors over time, by minimizing tax consequences while retaining control. By gifting business interests now at potentially lower valuations, future appreciation occurs outside the owner’s taxable estate.
• Business Insights – The valuation provides insights into the company’s value and helps owners make informed decisions about business growth. For family-owned businesses, valuation is crucial for equal distribution and succession planning.
• Accurate Reporting – Gift and estate tax planning require reporting fair market value of transferred assets. A professional valuation helps ensure compliance and reduces audit risk. Estate tax returns, especially for larger estates, have a high probability of IRS audit. A well-documented valuation helps defend against potential challenges.

Factors to consider before determining gift and estate tax valuation

Gift and estate tax valuation planning is meant to determine the value of an asset, which will then be taxed according to the rules and regulations. It is important to know the various factors that play an important role in determining the value of your property. Here are some of these factors:

• Valuation discounts – These discounts pertain to the value of your property as lower than the actual worth of the asset. The valuation discounts are applicable as a result of deductions that are allowed to you under certain circumstances. It is important that you understand these circumstances so that you can properly account for them in the gift and estate tax valuation process.
• Lack of marketability – In the case where the investible worth of a property is substantially below its actual worth, then you need to take into account the lack of marketability in the gift and estate tax valuation process. The lack of marketability refers to the fact that there is a lack of active buying and selling in the market for your property.
• Degree of control – It is important to consider the degree of control you have over the property you are trying to value. This means that to properly determine the value of your property, you need to consider all the rights you have over it. This could include the right to sell, transfer or lease your property, as well as the right to market it in order to determine its value.
• Relative size and ownership concentrations – The relative size is the extent of ownership that you have over a particular property. Similarly, ownership concentrations refer to the number of other owners who own a share of interest in the said property. As such, it is important to consider these factors before determining your property’s value.
• Interest controlled by the same member of the family – When the property is held by members of a family, then you need to consider this aspect while determining the value. As such, it is important to keep in mind that the value of your property may be influenced by the fact that it is controlled by a certain member of the family.
• Capital gain tax liabilities – The capital gain tax liabilities that may be associated with your property are an important factor that you need to consider in order to determine its value. In most cases, there is an additional capital gain tax that is levied when you sell or transfer your property. Thus, it is important that you consider capital gain tax liabilities in your valuation process.

Valuation discounts for gift and estate tax valuation

There are several situations that may require you to use discounts for gift and estate tax valuation. These are the situations where you will be able to claim a direct deduction from the actual value of your property in order to arrive at the reduced value that will be taxed. Following are some of the main valuation discounts that you need to understand and keep in mind when conducting the gift and estate tax planning for valuation:

• Discount for lack of control (DLOC)– When there is a lack of actual control over certain property, then you need to consider this aspect while conducting the gift and estate tax valuation. As such, when noncontrolling interests are part of the value of your property, then you will be able to take advantage of the discount for lack of control.
• Discount for lack of marketability (DLOM) – The discount for lack of marketability refers to the fact that certain properties may not be readily available on the open market or the marketplace is small. The lack of marketability is one of the major considerations in gift and estate tax valuation.
• Other discounts may include:
  • Minority interest discounts
  • Future interest discounts (for certain trusts)

Valuation discounts are powerful tools for gift and estate tax planning, offering significant potential for tax savings. However, their application requires careful consideration, professional expertise, and thorough documentation to withstand potential IRS scrutiny.

Gift and estate tax valuation approaches

There are several approaches that you can use to conduct the valuation for gift and estate tax purposes. These include the following:

Market approach 

In the market value approach, the value of the property is determined by taking into account the selling price of similar assets in the open market. While the relevant facts and circumstances are accounted for, the value of the property is determined by considering recent comparable sales.

For estimating the value of a residence using the Market Approach, the appraisal expert considers three recent comparable sales as shown below:

Comparable Property	Selling Price ($)	Adjustments for Size / Features ($)	Adjusted Price ($)
Property A	500,000	+20,000	520,000
Property B	480,000	-15,000	465,000
Property C	510,000	+5,000	515,000
Average			500,000

Estimated Market Value = $500,000

Cost Approach

Another approach that you can use is the cost approach. This approach involves you determining the value of your property based on the value of the land as compared to the current replacement cost of a new building. However, adjustments must be made, such as deducting the estimated depreciation and obsolescence

Using the cost approach, a commercial property’s value is determined as below:

	Cost ($)
Land Value	300,000
Construction Cost	1,500,000
Depreciation (10% of building)	-150,000
Replacement Cost	1,650,000

Estimated Value of building using Cost Approach = $1,650,000

Income approach

If the property generates a stream of income, then you need to consider this aspect while determining its value. The valuation will be done by dividing the net operating income by the capitalization rate.

Let’s assume a 10-year-old plantation that is expected to yield a harvest at age 30, with only one future revenue and annual management costs. The internal rate of return (IRR) is known at 8.5%.

Calculating Future Revenues Discounted to Present Value:

• Future Revenue: Expected revenue from harvest at age 30 = $3,000
• Years to Harvest = 30 – 10 = 20 years
• Discount Rate = 8.5% (or 0.085)

The formula to calculate the present value (V0) of a single sum (Vn) discounted over n years at an interest rate i is:

V0 = Vn / (1+i)^n

Substitute values:

V0 = 3000 / (1+0.085)^20 = 3000 / 5.112 = 586.85

Present Value of Future Revenue = $586.85

Calculating Future Costs Discounted to Present Value:

• Annual Management Costs = $50
• Discount Rate = 8.5% (or 0.085)
• Years Remaining = 20

The formula to calculate the present value (V0​) of a series of future annual payments is:

V0 = a×(1+i)^n−1 / i×(1+i)^n

V0 = 50 × (1+0.085)^20−1 / 0.085 × (1+0.085)^20

V0 = 50× (5.112−1) / (0.085 × 5.112) = 473.17

Present Value of Future Costs = $473.17

Calculating the Income Value:

Income Value = Present Value of Future Revenues − Present Value of Future Costs

Income Value = 586.85 − 473.17 = $113.68

Need help in planning your gift and estate tax valuation?

Due to the complexity of gift and estate tax planning, along with some regulations and impending changes to exemption limits, individuals and businesses should collaborate with experienced professionals for accurate gift and estate tax valuations.

By utilizing Eqvista’s gift and estate tax valuation services, individuals and businesses can get through valuation challenges and ensure compliance with relevant regulations. Our customized approach offers peace of mind throughout the valuation process.

Choose the right assets to gift to minimize tax liabilities, and contact us to learn more!