Gift & Estate Tax Valuation Explained: How to Value Assets for IRS Compliance
Transferring assets through gifts or estates is a major financial decision. But here's the challenge: determining accurate valuations isn't optional—it's legally required for IRS compliance.
Why does this matter? Whether you want to reduce tax liability, ensure fair distribution to heirs, or meet federal reporting rules, precise asset valuation is essential. The IRS maintains strict requirements for how businesses, property, and investments must be appraised for estate and gift tax purposes.
Non-compliance triggers serious consequences. You could face IRS audits, financial penalties, and legal battles. Transaction Capital LLC has prepared this guide to clarify the valuation process for IRS compliance. We'll examine Fair Market Value determination, approved methods, current IRS directives, and proven strategies to protect your wealth transfer plans.
Understanding the Three Types of Transfer Taxes
When you transfer assets, three different taxes may apply. Understanding each type helps you plan effectively.
1. Gift Tax
Gift tax is a federal tax on asset transfers during your lifetime. You give property to someone without receiving equal value in return.
The IRS imposes this tax to prevent people from avoiding estate taxes by giving away wealth before death.
Key points:
- Annual exclusion: $18,000 per recipient in 2025
- Married couples can give $36,000 per recipient jointly
- Gifts exceeding the annual exclusion count toward lifetime exemption
- Lifetime exemption: $13.99 million per individual in 2025
2. Estate Tax
Estate tax is a federal tax on property transfers when you die. The tax applies to estates exceeding the exemption threshold.
Key points:
- Federal exemption: $13.99 million per individual in 2025
- Tax rates range from 18% to 40% on amounts above the exemption
- Combined exemption for married couples: $27.98 million
- Applies to all assets: real estate, investments, business interests
3. Inheritance Tax
Inheritance tax is a state-level tax. Some states impose it on individuals receiving inherited assets.
Unlike estate tax (paid by the estate), beneficiaries pay inheritance tax.
Key points:
- Not all states have inheritance tax
- Tax rates vary by state (typically 10% to 18%)
- Rates often depend on the beneficiary's relationship to the deceased
- Spouses are usually exempt
Critical 2025 Update: Current exemption amounts are historically high but temporary. These amounts are scheduled to decrease significantly after 2025 unless Congress acts. This creates a limited window for wealth transfer planning.
Why Estate and Gift Tax Valuation Matters
Estate and gift tax valuations establish Fair Market Value (FMV) for assets you transfer. These transfers happen during your lifetime (gifts) or after death (estate distributions).
The IRS defines FMV as:
"The amount at which property would exchange hands between a knowledgeable buyer and seller. Neither party is under pressure to complete the transaction. Both possess reasonable awareness of pertinent facts."
This definition is fundamental. It ensures assets are valued accurately—neither inflated nor understated. This prevents both excessive taxation and underpayment penalties.
What happens with incorrect valuations?
- IRS examinations challenging your reported values
- Financial penalties plus interest for misstatements
- Loss of tax advantages in GRATs or family limited partnerships
- Extended audit periods (the IRS can review decades later)
- Litigation costs defending poor appraisals
Professional valuation provides more than a number. It offers legal protection and transparency throughout estate planning. Transaction Capital LLC's certified appraisers ensure your valuations withstand scrutiny from tax authorities, auditors, and courts.
Why Business Owners Need Gift and Estate Tax Valuation
Business owners face unique challenges in wealth transfer. Proper valuation becomes even more critical for several reasons:
1. Maximize Tax Savings
Valuation allows for legitimate discounts on business interests. These include:
- Minority interest discounts
- Lack of marketability discounts
- Lack of control adjustments
These discounts can reduce taxable value significantly. You transfer more wealth tax-free.
2. Strategic Succession Planning
By gifting business interests now at current valuations, future appreciation occurs outside your taxable estate.
This strategy is powerful for growing businesses. It locks in today's value while removing tomorrow's growth from estate taxes.
3. Equal Distribution Among Heirs
Professional valuation ensures fair distribution among family members. Some heirs may receive business interests. Others receive cash or property.
Accurate valuation prevents family disputes and legal challenges.
4. Business Continuity
Valuation facilitates smooth ownership transitions. Transfer portions to key employees or next-generation leaders.
You maintain control while gradually transferring ownership.
5. Audit Protection
Estate tax returns for business owners face high IRS audit rates. Well-documented valuations defend against challenges.
Proper documentation is your first line of defense.
The Critical Importance of IRS Compliance
Tax authorities carefully examine valuations attached to Form 706 (Estate Tax Return) and Form 709 (Gift Tax Return).
Both forms require appraisals prepared by qualified, independent professionals. These professionals must follow established industry frameworks:
- Revenue Ruling 59-60: Core IRS guidance for valuing private businesses
- AICPA SSVS No. 1: Valuation standards from the American Institute of CPAs
- USPAP: Uniform Standards of Professional Appraisal Practice
- IVS: International Valuation Standards
Properly documented valuations activate a three-year statute of limitations. This protects you from extended IRS challenges.
Incomplete or non-compliant disclosures? The IRS can review your returns indefinitely.
Professional valuation isn't optional. It's your primary defense against regulatory uncertainty and potential litigation.
Revenue Ruling 59-60: The Foundation
Established in 1959, Revenue Ruling 59-60 remains the authoritative guideline. It applies to valuing privately held business interests for gift and estate tax purposes.
This ruling requires appraisers to evaluate eight critical factors:
- Business nature and history: Understanding the company's origins and evolution
- Economic conditions: Assessing trends affecting the business sector
- Balance sheet strength: Analyzing book value and financial position
- Profit generation: Evaluating earnings patterns and income potential
- Dividend history: Examining past payments and future capacity
- Intangible value: Identifying goodwill and non-physical assets
- Historical transactions: Reviewing previous equity sales
- Comparable companies: Benchmarking against similar public entities
IRS-compliant reports address each factor systematically. They demonstrate how evidence, analysis, and methodology connect to support the final value.
Transaction Capital LLC's appraisers document every consideration transparently. This creates audit-defensible reports that withstand regulatory scrutiny.
Key Factors Affecting Gift and Estate Tax Valuation
Several factors significantly impact your property's valuation. Understanding these helps you plan effectively.
1. Degree of Control
Your control rights over the property affect its value. This includes:
- Right to sell or transfer
- Right to lease or liquidate
- Ability to influence management decisions
- Power to declare dividends
Minority interests typically receive discounts for lack of control.
2. Marketability Considerations
How easily can the asset be sold? Limited marketability reduces value.
Private company shares are less marketable than public stock. This justifies the discount for lack of marketability (DLOM).
3. Relative Size and Ownership Concentration
The percentage of ownership you hold matters. Larger blocks may command control premiums. Smaller blocks receive minority discounts.
The number of other owners also affects value. Concentrated ownership differs from widely distributed interests.
4. Family Attribution Rules
When family members collectively control the business, IRS attribution rules may apply.
The IRS may aggregate family-owned interests for control purposes. This affects discount calculations.
5. Capital Gains Tax Liabilities
Built-in capital gains create potential tax liabilities. When a company holds appreciated assets, future sale triggers taxes.
This embedded tax liability may justify additional valuation discounts.
6. Restrictions and Buy-Sell Agreements
Contractual restrictions on transfer affect value. Buy-sell agreements may limit sale prices or eligible buyers.
These restrictions must be at arm's length to receive IRS recognition.
Fair Market Value vs. Other Value Standards
Not all valuations satisfy IRS requirements.
A 409A valuation (for stock option pricing) won't work for estate or gift tax submissions. Neither will a financial reporting appraisal (for ASC 805 or ASC 820).
Here's why:
| Criteria | 409A Valuation | Estate & Gift Tax Valuation |
|---|---|---|
| Primary Goal | Stock option pricing | Tax compliance for transfers |
| Value Standard | Fair Value (common stock) | Fair Market Value (all interests) |
| Discount Applications | Standardized assumptions | Customized, data-supported (DLOC/DLOM) |
| Regulations | IRC Section 409A | IRC Sections 2031 & 2512 |
| Scrutiny Level | Lower risk (safe harbor) | High IRS examination potential |
Submitting the wrong report can invalidate your entire tax filing.
Estate and gift tax valuations must determine FMV as of the transfer date. They must comply with all IRS regulations and professional standards.
IRS Guidance on Post-Valuation Events
In 2021, the IRS issued Chief Counsel Advice (CCA) 202152018. This memorandum changed how professionals treat post-valuation events.
The key point: Pending or foreseeable transactions must be incorporated into FMV determinations.
These include:
- Acquisition offers
- Merger negotiations
- Investment banking engagements
When assets are actively marketed or sale offers exist on the valuation date, these are "known or knowable" facts. They must influence the final value.
Ignoring such information may constitute underreporting. This exposes you to penalties.
What this means for you:
- Get current appraisals reflecting all circumstances on the transfer date
- Document pending transactions (even if they close later)
- Maintain consistency across gifts, estates, and charitable deductions
CCA 202152018 reinforces a fundamental principle: compliance requires full awareness of all relevant factors affecting value.
Core Valuation Approaches for IRS Compliance
Credentialed appraisers use three recognized methodologies. The right approach depends on your asset's characteristics, income profile, and market comparisons.
1. The Income Approach
This method determines business value by converting future cash flows into present value.
Common techniques:
- Discounted Cash Flow (DCF) Analysis: Projects future cash flows and discounts them using risk-adjusted rates
- Capitalization of Earnings: Converts normalized earnings into value using a capitalization rate
Essential components:
- Revenue projections and profit margins
- Growth assumptions
- Discount rates (cost of equity or WACC)
- Terminal value calculations
Example calculation:
- Value = $500,000 / (0.15 - 0.03) = $4,166,667
This works best for enterprises with predictable earnings and defensible growth projections.
Transaction Capital LLC's modeling incorporates industry benchmarks, economic forecasts, and company-specific risk factors.
2. The Market Approach
This method estimates value through comparison with similar companies or recent transactions.
Valuation multiples include:
- Price-to-Earnings (P/E) Ratios: Comparing earnings to market value
- Enterprise Value-to-EBITDA: Analyzing total value against operating cash flow
- Revenue Multiples: Benchmarking sales-based metrics
Example calculation:
Your company has EBITDA of $1,000,000. Comparable companies trade at 6x EBITDA.
Indicated value: $1,000,000 × 6 = $6,000,000
Then apply appropriate discounts for size, control, and marketability.
Appraisers adjust for differences in size, growth rates, profitability, and control characteristics.
This approach delivers objective benchmarks aligned with actual market data. It provides strong support for FMV conclusions.
3. The Asset (Cost) Approach
This method values enterprises by adjusting individual assets and liabilities to fair market values.
Best used for:
- Capital-intensive businesses (real estate companies, equipment lessors)
- Early-stage ventures lacking positive cash flow
- Liquidation scenarios
Example calculation:
| Item | Amount |
|---|---|
| Land Value | $300,000 |
| Building Replacement Cost | $1,500,000 |
| Less: Depreciation (10%) | -$150,000 |
| Equipment (Fair Value) | $200,000 |
| Total Assets | $1,850,000 |
| Less: Liabilities | -$350,000 |
| Net Asset Value | $1,500,000 |
While it establishes a valuation floor, this approach may undervalue businesses with strong earnings or significant intangible assets.
Professional reports typically use multiple approaches. They reconcile results with transparent weighting rationale.
Applying Valuation Discounts
Estate and gift tax valuations often incorporate discounts. These reflect real-world ownership limitations.
Discount for Lack of Control (DLOC)
This applies when minority owners cannot influence corporate governance, dividend policies, or strategic decisions.
DLOC typically ranges between 5% and 25%. It's supported by empirical control premium studies and shareholder agreement provisions.
Example: A 20% minority interest in a $5 million company might be worth $800,000 ($1,000,000 × 80%) after applying a 20% DLOC.
Discount for Lack of Marketability (DLOM)
This reflects the illiquidity of private company interests compared to public securities.
DLOM receives support through:
- Restricted stock studies
- Pre-IPO transaction analyses
- Quantitative option-pricing models
Discounts typically range from 20% to 40%. The percentage depends on company-specific circumstances.
Example: After DLOC, the $800,000 value might be further reduced by 30% DLOM to $560,000.
Additional Discounts
- Minority Interest Discounts: For small ownership percentages
- Key-Person Discounts: Reflecting dependency on specific individuals
- Built-in Capital Gains Discounts: Recognizing embedded tax liabilities
- Voting vs. Non-Voting Adjustments: Distinguishing between equity classes
- Future Interest Discounts: For certain trust structures where beneficiaries receive interests later
The IRS demands detailed explanation for each discount. Arbitrary percentages invite audit challenges.
Transaction Capital LLC provides comprehensive discount analyses. These are supported by published studies, transaction databases, and quantitative models.
Estate Valuation Requirements for Form 706
When estates exceed the federal exemption threshold ($13.99 million per individual in 2025), executors must file Form 706.
Filing Requirements
You must file Form 706 if:
- The gross estate exceeds the exemption amount
- The deceased made certain gifts during life
- You're electing portability of unused exemption to surviving spouse
Valuation Date Options
You have two choices for valuation date:
1. Date of Death (Primary Date)
Most estates use this date. Value all assets as of the moment of death.
2. Alternate Valuation Date
You may elect a date six months after death if:
- It reduces both estate value AND estate tax liability
- The election is irrevocable once made
This option helps when asset values decline after death.
Every asset requires FMV appraisal. This includes real property, investment portfolios, and business interests.
Essential considerations:
- Valuations must cover all ownership interests plus liabilities
- Closely held business appraisals need detailed financial analysis
- Earnings normalization is required
- Discount justification must be comprehensive
- Charitable bequests and marital deductions need supporting valuations
Accurate reporting ensures compliance. It also minimizes estate tax liability and future beneficiary disputes.
Transaction Capital LLC prepares comprehensive estate appraisals meeting all IRS documentation requirements.
Gift Valuation Requirements for Form 709
Gifts exceeding the annual exclusion ($18,000 per recipient in 2025) require Form 709 filing.
When to File Form 709
You must file if:
- You give more than $18,000 to any one person
- You split gifts with your spouse
- You give future interests (regardless of amount)
- You give interests in closely held businesses
Adequate Disclosure Requirements
To start the statute of limitations, returns must include:
- Qualified appraisals signed by credentialed professionals
- Comprehensive property descriptions
- Methodology explanations
- Specific valuation date identification
- Disclosure of restrictive provisions or special terms
Proper disclosure prevents IRS re-examination years later.
Many taxpayers mistakenly submit outdated 409A valuations. These are unacceptable for gift tax purposes. They fail to trigger statute of limitations protection.
Transaction Capital LLC prepares gift tax valuations specifically for Form 709 compliance. We ensure adequate disclosure and regulatory protection.
Strategies to Reduce Gift and Estate Tax Burden
Strategic planning can significantly reduce your transfer tax liability. Here are proven approaches:
1. Annual Exclusion Strategy
Use the annual exclusion ($18,000 per recipient in 2025) consistently.
Example: A couple with three children and six grandchildren can transfer $324,000 annually ($18,000 × 9 recipients × 2 spouses) without using lifetime exemption.
Over 10 years, that's $3.24 million transferred tax-free.
2. Lifetime Exemption Planning
The current exemption ($13.99 million per individual) is historically high but temporary.
Strategy: Make substantial gifts now before exemptions decrease after 2025.
Even if exemptions decrease later, the IRS won't claw back gifts made under current exemptions.
3. Charitable Giving
Donations to qualified charities provide multiple benefits:
- Income tax deduction in the year of gift
- Removal of assets from taxable estate
- No gift tax on charitable transfers
- Can satisfy philanthropic goals while reducing taxes
Popular structures:
- Charitable Remainder Trusts (CRT)
- Charitable Lead Trusts (CLT)
- Donor-Advised Funds
4. Grantor Retained Annuity Trusts (GRATs)
GRATs allow you to transfer appreciating assets while minimizing gift tax.
How it works:
- You transfer assets to the trust
- You receive annuity payments for a term
- Remaining assets pass to beneficiaries
- Only the remainder interest is a taxable gift
This is powerful for assets expected to appreciate significantly.
5. Family Limited Partnerships (FLPs)
FLPs allow you to gift business interests while maintaining control.
Benefits:
- Retain control as general partner
- Gift limited partnership interests to family
- Apply valuation discounts to gifts
- Centralize management
- Provide liability protection
6. Irrevocable Life Insurance Trusts (ILITs)
ILITs remove life insurance proceeds from your taxable estate.
How it works:
- Trust owns the policy (not you)
- Beneficiaries receive proceeds outside estate
- Proceeds aren't subject to estate tax
- Can provide liquidity for estate taxes
7. Intentionally Defective Grantor Trusts (IDGTs)
IDGTs allow you to "freeze" asset values for estate tax while you pay income taxes.
Benefits:
- Remove appreciation from estate
- Your payment of income taxes is additional tax-free gift
- Assets grow outside your estate
Important: All strategies require professional guidance. Work with experienced estate planning attorneys and valuation experts.
The Role of Qualified Appraisers
The Role of Qualified Appraisers
They must:
- Possess recognized credentials (ABV®, ASA, CVA®, MRICS)
- Demonstrate verifiable education and experience
- Have documented expertise in the relevant asset class
- Maintain complete independence (no financial interest in outcomes)
- Adhere to USPAP and AICPA professional standards
Engaging certified valuation firms guarantees your reports satisfy all compliance requirements. They withstand IRS audits, court proceedings, and regulatory challenges.
Transaction Capital LLC's team holds multiple recognized credentials. We have over 15 years of specialized experience. We've completed 2,500+ valuations across 35+ industries.
Critical Mistakes to Avoid
1. Using outdated appraisals
Always get valuations dated close to the transfer. Outdated reports invite IRS challenges.
2. Ignoring pending transactions
Disclose acquisition offers or negotiations if known on the valuation date.
3. Maintaining inconsistent filings
Using different values across related submissions raises red flags.
4. Applying unsupported discounts
All adjustments demand data-driven justification. No arbitrary percentages.
5. Inadequate documentation
Missing workpapers or unsupported assumptions invite examination.
6. Using automated reports
Algorithm-generated appraisals rarely satisfy IRS standards.
7. Failing to engage independent appraisers
Related-party valuations lack credibility with tax authorities.
8. Underreporting or overreporting values
Both create problems. Underreporting triggers penalties. Overreporting means unnecessary taxes.
Audit-ready reports include comprehensive narratives and transparent assumptions. They have extensive supporting appendices justifying every conclusion.
Transaction Capital LLC delivers documentation exceeding IRS requirements. We provide complete audit defense support.
Transaction Capital LLC's Valuation Process
Every estate and gift tax valuation follows a rigorous methodology:
1. Engagement Definition
We clarify purpose, valuation date, and asset characteristics.
2. Data Collection
We obtain financial statements, tax returns, shareholder agreements, and projections.
3. Industry Analysis
We assess macroeconomic conditions, sector trends, and competitive positioning.
4. Valuation Modeling
We apply income, market, and asset-based approaches appropriately.
5. Discount Analysis
We support DLOC and DLOM using published studies and company-specific factors.
6. Event Documentation
We record all known or knowable circumstances affecting value.
7. Reconciliation
We compare results from multiple approaches and finalize FMV.
8. Compliance Review
We ensure adherence to IRS and professional standards.
9. Reporting
We deliver audit-defensible reports with certified appraiser signatures.
Every appraisal achieves USPAP, IVS, and AICPA compliance. This ensures complete defensibility in audits, litigation, or regulatory proceedings.
The Benefits of Proper Valuation
Proper valuation provides multiple advantages beyond tax compliance:
1. Avoid Penalties and Audits
Accurate, well-documented valuations reduce audit risk. When audits occur, proper documentation supports your position.
2. Maximize Tax Savings
Professional valuation identifies all legitimate discounts and deductions. This minimizes your tax burden legally.
3. Facilitate Strategic Planning
Understanding asset values enables better decisions about:
- When to make gifts
- Which assets to transfer
- How to structure transfers
- Succession timing
4. Prevent Family Disputes
Clear, professional valuations prevent disagreements among heirs. Everyone understands the rationale behind distribution decisions.
5. Ensure Business Continuity
For business owners, proper valuation facilitates smooth transitions. The next generation understands the business value and their inheritance.
6. Peace of Mind
Knowing your valuations are defensible and compliant reduces stress. You can focus on other aspects of estate planning.
Essential Takeaways
- Understand the three types of transfer taxes: gift tax, estate tax, and inheritance tax
- Use Fair Market Value (FMV) exclusively for estate and gift tax reporting
- Take advantage of current high exemptions before they decrease after 2025
- Address all eight factors from Revenue Ruling 59-60
- Incorporate post-valuation events per IRS CCA 202152018
- File Form 706 when estates exceed $13.99 million per individual
- File Form 709 when gifts exceed $18,000 per recipient annually
- Use annual exclusion strategy to transfer wealth systematically
- Consider charitable giving for tax benefits and philanthropic goals
- Explore irrevocable trusts, GRATs, and FLPs for advanced planning
- Retain qualified, credentialed appraisers meeting IRS standards
- Provide adequate disclosure to start the three-year statute of limitations
- Choose between date of death or alternate valuation date strategically
- Apply empirically supported discounts (DLOC and DLOM)
- Preserve consistency across all related tax filings
- Get fresh appraisals for each transfer (don't recycle old reports)
- Maintain comprehensive documentation supporting all assumptions
Defensible valuations support tax compliance. They protect your legacy, minimize beneficiary conflicts, and prevent disputes with tax authorities.
Why Choose Transaction Capital LLC
Transaction Capital LLC is a Delaware-registered valuation firm. We specialize in certified estate and gift tax valuations, 409A appraisals, business valuations, and financial reporting services.
Our team includes credentialed experts holding ABV®, ASA, CVA®, and MRICS designations. These are the highest credentials in the valuation profession.
We've completed over 2,500 valuations across diverse industries. Our clients include founders, families, trusts, institutional investors, and corporations.
Our reports meet rigorous standards from the AICPA, USPAP, and IRS. We deliver accuracy, transparency, and complete compliance.
Our services include:
- IRS-defensible estate and gift tax valuations meeting all disclosure requirements
- Empirically supported discounts (DLOC, DLOM, and specialty discounts)
- Fast delivery (3–5 business days for standard assignments)
- Transparent fixed-fee pricing (starting at $1,000)
- Comprehensive audit support and documentation
- Expert testimony when required
- Post-valuation assistance for IRS examinations and regulatory inquiries
- Strategic planning consultation for wealth transfer
Ready to ensure IRS compliance? Contact Transaction Capital LLC for a complimentary 15-minute consultation to discuss your estate planning valuation needs.
Conclusion: Protecting Your Legacy
Estate and gift tax valuation is more than a compliance exercise. It's a fundamental responsibility ensuring fairness, precision, and protection for future generations.
The IRS demands rigor, transparency, and independence in every appraisal. Valuation errors can compromise more than finances—they can undermine your entire estate plan.
The current window of high exemptions is closing. After 2025, exemption amounts are scheduled to decrease significantly. This creates urgency for wealth transfer planning now.
Engaging qualified professionals ensures your legacy remains preserved. Your filings withstand scrutiny. Your wealth transfer strategy succeeds as intended.
Strategic use of gifting strategies, combined with professional valuation, can save millions in transfer taxes. The key is acting now with proper documentation and expert guidance.
For IRS-compliant, peer-reviewed valuations, contact Transaction Capital LLC. We deliver certified expertise with unwavering precision in every engagement.
Get your audit-ready valuation starting at $1,000. Delivery in 3-5 business days. Request your quote today.
