March 16 , 2018

Estate Planning and The Value of Your Business

If you are interested in estate planning - which should be most of us - and own a business you need to understand the value of your business as part of the planning exercise. A business will usually represent a very large if not the largest assets on your balance sheet. One of the main goals in the estate planning process is to minimize the tax bill for your heirs. But there are many ways to create an estate plan in which you can pay estate taxes or avoid them altogether.

Paying Estate Taxes

Understanding the value of your business can help you to determine what your estate taxes might be. Your estate must have cash, marketable securities, etc. that are sufficient to pay the taxes if you can’t avoid them. Family members who might take over the business could be burdened with paying estate taxes to the extent that their personal lifestyles or the business may suffer. Knowing the value will help you estimate the estate taxes and plan for payment with other assets or life insurance. However, most people don’t like paying taxes......

Avoiding Estate Taxes

  • Gifting a portion of the business

In order to do this you must know that value of your business. Depending on the businesses’ value and estimated taxes, the owner most likely would not have to give up control. The business, if managed well, could also be an asset that will go up in value over your planning horizon. In this case a business owner might want to gift other assets.

  • Gifting other assets

Knowing the value of your business can help to determine what other assets might be given to family members to reduce the size of the taxable estate. Other investments, real estate, collectibles, etc., could be given to family members, while the business is retained.

  • Life insurance

If the estate cannot be reduced enough to avoid the estate tax by giving away other assets, then life insurance might be a solution. Check with a licensed provider to discuss keeping it out of your estate. Knowing the value of your business helps you know how much life insurance might be necessary.

IRS-approved valuation

The value of your business should be determined by a Business Valuation Expert using a method that the IRS would approve for estate tax purposes. This is because the value arrived at for planning purposes needs to be the same as that for tax purposes. Tax compliance would be important especially if the valuation were to become part of the supporting documentation attached to a gift tax return resulting from the planning process. The value arrived at would be “Fair Market Value” and would likely be subjected to a discounts for lack of marketability and lack of control (or “minority interest”). Finally, since a businesses’ revenue and earnings can fluctuate, it’s important to update the business valuation periodically to ensure the value is the same or similar as when initial planning took place. A profitable and growing business should increase in value as time passes, and vice versa. Estate planning is a continuing process especially when the value of your business is major part of that process.