Estate planning is an important process for any business owner. The process involves creating a plan for the transition of ownership and management to the next generation. The goal of estate planning is to ensure progression of the company, minimize taxes, prevent family disputes, and protect the legacy of the company.
The Role of Valuation in Planning
An essential part of estate planning is obtaining a business valuation. Determining the fair market value of the business in the planning process creates a foundation for tax strategies, succession plans, and fair distribution of assets. It also ensures the owner of the business maintains control because it allows for time to estimate potential tax liabilities, structure ownership transfers, and ensure fair distributions to the heirs. Getting a valuation in the planning process is a proactive measure. Without it, the estate may rush decisions and be surprised by tax levels.
The Role of Valuation in Compliance
When an estate is filed, a business valuation must be performed on the day of death or six months after. This requirement is regardless of when the last valuation for the company was performed. The valuation as of the date of death (or six months after) is used to defend the fair market value of the business that is used to calculate the estate tax liability.
How Planning Supports Compliance
Business valuations are important in the planning and compliance aspects of an estate. In the planning process the valuation is a proactive approach that allows for flexibility and control over the company. In the compliance process the valuation is a reactive approach that is used for documentation and to defend the fair market value of the company.
When frequent valuations are done in the planning process, the compliance process will be much smoother. The planning valuation provides a baseline, and this helps to predict taxes and reduce surprises. It also provides support documentation to the compliance valuation strengthening the defensibility of the report. Issues such as outdated agreements or missing documentation are typically addressed in planning valuations, preventing delays when filing estate taxes.
Overall, regardless of the stage your business is in, valuations for estate planning purposes are always recommended. It is a strategic move that makes the compliance process more accurate, more efficient, and less stressful. Planning valuations give owners the opportunity to shape outcomes, not just respond to them. Let’s start the conversation.
