Summer is often a good time to revisit your estate plan, especially if you're getting together with loved ones for vacations or family gatherings. Of course, if you own a closely held business, it should be a critical part of your plan.
Although you might be aware of some rules of thumb for valuing businesses in your industry, relying solely on these simplified formulas can lead to estate planning mishaps. And, in today's uncertain markets, these formulas — and even formal valuations you previously obtained — can become outdated. A business valuation professional can help you get a clearer, more reliable understanding of how much your business is worth based on recent developments and current economic conditions.
There's another important reason to have your discussion soon: The current federal gift and estate tax exemption is generous compared to historical levels. For 2026, the lifetime exemption is $15 million, up from $13.99 million in 2025. (The amount is effectively doubled for married couples.) This exemption is indexed annually for inflation.
The One Big Beautiful Bill Act, which was signed into law on July 4, 2025, made the elevated exemption permanent, meaning that it has no expiration date. But Congress could change this tax law provision in the future. Depending on the size of your estate and the value of your business, it might make sense to start transferring some ownership interests while the current exemption is available. The gift and estate tax rate remains at 40%, so the tax is costly when it does apply.
If you plan to take advantage of the annual gift tax exclusion, you'll need to do so before year end because this exclusion doesn't carry over from year to year. For 2026, the annual exclusion amount is $19,000 (the same as 2025).
That means you can transfer ownership interests worth up to $19,000 per recipient (twice that if you split the gift with your spouse) under the annual gift tax exclusion free of federal gift tax without tapping into your lifetime exemption. Over time, annual gifts of closely held business interests add up.
Beware: Some states impose estate or inheritance tax at a lower threshold than the federal government does. So, learn the rules in your state to avoid an unexpected tax liability or other unintended consequences of an asset transfer.
Knowing the value of your business will help you formulate a long-term strategy for transferring your wealth. The value determines how many shares can be transferred to your loved ones without incurring gift or estate taxes.
The appropriate standard of value for gift and estate tax purposes is fair market value. The IRS strongly discourages do-it-yourself valuations. Using a "qualified appraiser" demonstrates that you acted in good faith when filing a gift or estate tax return. A qualified business appraiser has earned a designation from a recognized business valuation professional organization or otherwise meets certain minimum education and experience requirements.
Shares of closely held businesses aren't readily traded on a public stock market. Without published stock prices to rely on, valuators turn to IRS Revenue Ruling 59-60 for guidance on valuing private business interests. It instructs valuators to consider both company-specific factors and external market conditions on the valuation date.
In addition, certain ownership interests may be eligible for discounts for lack of control and marketability. These discounts vary widely, depending on the facts and circumstances. Valuation experts use real-world empirical data to support their analyses, rather than gut instinct or industry rules of thumb. To the extent that valuation discounts apply to ownership interests in your business, they may lower the value of gifts for federal gift tax purposes, allowing you to give more shares to your loved ones tax-free under your annual exclusions or lifetime exemption.
Typically, businesses appreciate in value over time. This is another reason to gift shares to loved ones sooner rather than later. For example, assuming a 5% annual growth rate, a stock that's worth $10 per share today would be worth about $16.30 in 10 years or $26.50 in 20 years.
Proactive gifting strategies allow owners to transfer business interests during their lifetimes, while values may be relatively low. This exposes less of their net worth to estate tax. Note that IRS regulations prevent gifts made during your lifetime from being "clawed back" into your estate and hit with estate taxes if the exemption is lower when you die.
Do you know how much your business is worth? Answering this question can help you determine the optimal strategy for preserving your wealth and minimizing taxes. A formal business valuation provides a reliable foundation for informed decision-making. Contact a valuation professional to get started. The sooner you know where you stand, the more options you may have.
Get in touch today and find out how we can help you meet your objectives.
