Summer presents an ideal opportunity for business owners to reassess their estate plans. With children on break or family gatherings like vacations or backyard barbecues, family is often at 
the forefront of our minds. This makes it a perfect time to discuss estate planning goals, especially how your business fits into your overall plan.
Assessing Business Value
Before any family discussions, it’s crucial to understand the current value of your business. Market conditions can significantly impact this value, so it’s essential to have an accurate, up-to-date valuation.
Urgency of Timing
An important consideration is the current federal gift and estate tax exemption, which is set to expire at the end of 2025 unless extended by Congress. For 2024, the exemption is $13.61 million, effectively doubled for married couples and indexed for inflation. However, from January 1, 2026, this exemption is expected to drop to an inflation-adjusted $5 million, likely around $7 million or $8 million. Given this potential decrease, it might be wise to transfer some ownership interests while the higher exemption is still in place.
Understanding Business Value
Knowing your business’s value is key to planning your wealth transfer strategy. This value dictates how many shares can be transferred to loved ones without incurring gift or estate taxes. For tax purposes, fair market value is used, and the IRS recommends employing a “qualified appraiser” to ensure accuracy and good faith in your filings.
Valuation Considerations
Shares in privately held businesses aren’t traded publicly, so valuators follow IRS Revenue Ruling 59-60, considering these eight factors:
- Nature and history of the business,
- Industry and economic outlook,
- Book value and financial condition,
- Earnings capacity,
- Dividend history or potential,
- Goodwill and intangible assets,
- Prior share sales and block size,
- Comparable transaction prices.
Certain ownership interests may also qualify for discounts due to lack of control and marketability. Experts rely on empirical data, not gut feelings, to support their valuations.
Benefits of Early Gifting
Businesses typically increase in value over time. Gifting shares now can be beneficial, as it exposes less of your net worth to future estate taxes. For instance, a stock worth $100 per share today might grow to $163 in 10 years or $265 in 20 years, assuming a 5% annual growth rate. Current IRS regulations protect lifetime gifts from being “clawed back” if exemptions decrease upon your death. A professional appraisal can help you maximize the exemption before it potentially decreases in 2026.
Professional Guidance
Regularly monitoring your business’s value and consulting with your estate planning professional is crucial. Legislative changes could alter the estate tax landscape, including extending the current exemption, changing tax rates, or repealing the estate tax.
The professionals at Sol Schwartz & Associates are available to support your long-term planning needs. Just leave your contact information below and we will get back to you promptly.
FURTHER READING:
5 common estate planning mistakes…and fixes
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