Page 6 - Business Valuation for Estates & Gift Taxes

Chapter 1

Scope

The intent of this practice aid is to highlight best practices for valuations performed for estate and gift
tax purposes. This practice aid does not provide in-depth discussions of business valuation methodolo-
gies. For that level of detail, there are a plethora of books, practices aids, and online courses available
that explore the intricacies of business valuation. The Forensic and Valuation Services (FVS) section of
the AICPA website can be a valuable resource for more in-depth learning materials. Instead, this prac-
tice aid will address the broader issues and topics related to business valuation specifically from the per-
spective of a CPA who performs the valuation of a business, business ownership interest, security, or in-
tangible asset (herein after referred to as valuation analyst) for estate tax or gift tax purposes.

Estate and Gift Tax Overview

The impact of estate and gift taxes on estate planning strategies must be constantly monitored and evalu-
ated as both the estate tax rates and exemption amounts change from year to year. For example, the top
federal estate tax rate has declined to 40 percent from 48 percent over the last 10 years (2004–2014). In
conjunction with the decline in the estate tax rates, the federal estate exemption amount has increased to
$5.34 million from $1.5 million for the same period. Fluctuations of this magnitude can have significant,
and possibly unintended, consequences on an estate plan especially if it is not drafted to account for
changes to tax and exemption amounts from year to year. Given the dynamic nature of the estate and gift
tax rules and regulations, estate planning professionals, including valuation analysts, must do their part
to stay fully informed about how current and future changes in this area can and could impact the pro-
fessional guidance given to clients. fn 1

The estate tax, sometimes referred to as a "death tax", and the gift tax must be considered together when
developing any estate planning strategy. Understanding the differences between the two taxes, however,
is important to maximize wealth transfer to the intended beneficiaries.

The estate tax is an excise tax paid by the decedent’s estate on the fair market value of the net assets in-
cluded in the decedent’s estate on the date of death. fn 2 In order to assess what assets and liabilities
make up the gross estate, the estate’s executor will conduct an accounting (that is, inventory), which is
generally performed with the assistance of legal and financial professionals. Once the executor and pro-
bate court have agreed that all estate assets and liabilities are accounted for, the assets and liabilities are
assigned a fair market value that will, in turn, be reported on the IRS Form 706 (Form 706). The total
fair value of all of the estate’s assets is the gross estate. The includible property may consist of cash, se-
curities, real estate, insurance, trusts, annuities, business interests, art, jewelry, and other assets. The to-
tal fair value of all of the estate’s liabilities is the total allowable deductions. Allowable deductions may

fn 1
N.B., In addition to federal estate taxes, several states impose taxes that are considered "estate taxes" or "inheritance taxes" which
must be considered as part of the estate planning process.

fn 2
The fair market value of the estate may be determined on an alternative valuation date. See chapter 3 IRC Section 2032.

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