The short answer: Gift and estate tax valuation sets the fair market value of what you give away during your life or leave at death, so the right tax can be reported on Form 709 or Form 706. For 2026, each person can give $19,000 a year to anyone tax-free and has a $15,000,000 lifetime exemption, with tax of up to 40% above it. Business interests are usually valued with the market, income and asset approaches, and minority stakes often qualify for discounts for lack of control and marketability.
Independent gift and estate tax valuations for business owners and families planning a transfer.
If you own a business, hold significant assets or plan to pass wealth to the next generation, the value you put on those assets decides how much tax you or your heirs pay. The 2025 tax law made the higher federal exemption permanent, at $15,000,000 per person for 2026, which removed the rush to gift before an expected cut. It did not remove the need for careful valuation: the IRS still reviews every transfer of a closely held business, and state estate taxes often start far lower. An accurate valuation depends on the critical factors the IRS expects appraisers to weigh.
This guide covers the basics of fair market value, the approaches professional appraisers use, the discounts that can lower taxable value, the mistakes that invite IRS challenges, and how to file correctly.
Key takeaways
- 2026 figures: $19,000 annual exclusion per recipient; $15,000,000 lifetime exemption per person; top rate 40%.
- Not dropping: the higher exemption is now permanent and indexed for inflation.
- Fair market value is the standard: willing buyer, willing seller, no compulsion, reasonable knowledge of the facts.
- Discounts: minority, non-marketable interests are often valued well below their pro rata share, if the discounts are supported.
- Disclose to close: adequate disclosure on Form 709 starts a three-year limit on IRS challenges.
- Penalties: undervaluing by too much brings a 20% or 40% penalty on the tax underpaid.
What Is Gift and Estate Tax Valuation?
Gift and estate tax valuation is the process of finding the fair market value of assets transferred during a person’s lifetime or at death, so that the correct tax can be calculated and reported to the IRS. Without an accurate valuation you cannot file gift or estate tax returns correctly, and you expose yourself to penalties, interest and audits.
Defining Fair Market Value (FMV)
Fair market value is the foundation of every valuation. The IRS defines it as the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts. In simpler terms, it is what the asset would realistically sell for, on the valuation date, to a hypothetical buyer.
Gift Tax vs. Estate Tax vs. Inheritance Tax
Though often grouped together, these taxes work differently:
| Tax | When it applies | Key thresholds and rates (2026) |
|---|---|---|
| Federal gift tax | Transfers during your lifetime | $19,000 annual exclusion per recipient ($38,000 for a married couple splitting gifts); lifetime exemption of $15,000,000 shared with the estate tax; rates 18% to 40% |
| Federal estate tax | Transfers at death | $15,000,000 exemption per person (2026), indexed for inflation; unused exemption can pass to a surviving spouse; top rate 40% |
| State estate tax | Estates above the state's own threshold | About a dozen states and DC; some exemptions are far lower, such as $1 million in Oregon and $2 million in Massachusetts |
| State inheritance tax | Paid by the person inheriting | Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania; rates up to 16%, often zero for spouses and children |
How the Federal Tax Works
Federal gift and estate tax rates are progressive, reaching 40% on taxable transfers above the lifetime exemption. Taxable gifts during your life reduce the exemption left for your estate. Gifts to a US citizen spouse are generally unlimited and tax-free, while gifts to a spouse who is not a US citizen are tax-free up to $194,000 a year in 2026.
Why Business Owners Should Plan Valuation Now
For business owners, valuation is not just a tax formality. It shapes how much of your company’s value stays in your family and how smoothly ownership changes hands.
Support Succession Planning
For family businesses, a valuation gives the clarity needed to divide ownership fairly among children, spouses and key employees. It also supports buy-sell agreements and generational transfer plans.
Gain Strategic Business Insight
Beyond tax planning, a valuation shows how the business is actually performing. It highlights strengths and weaknesses and informs decisions on growth, financing and exit.
Use Valuation Discounts
Professional valuations often apply discounts for lack of control and lack of marketability. Combined, these commonly reduce the value of a minority interest by roughly 20% to 40%, though the right figure depends on the facts and must be supported.
Reduce IRS Audit Risk
Larger estates are audited far more often. A well-documented, professionally prepared valuation is your first line of defense, because it shows the figures came from a recognized method.
Move Future Growth Out of Your Estate
If your business is growing, gifting shares at today’s value means future growth happens outside your taxable estate.
Worked example: you gift shares worth $5,000,000 today, using $5,000,000 of your $15,000,000 lifetime exemption (less any annual exclusion). If those shares are worth $15,000,000 when you die, the $10,000,000 of growth is not in your estate, which at a 40% rate could save up to $4,000,000 of estate tax. The trade-off: the recipient takes your original tax basis, not a stepped-up basis at death, so capital gains tax on a later sale may be higher.
Key Factors That Influence Gift and Estate Tax Valuation
No two valuations are identical, because many variables shape the final number. Knowing them helps you anticipate how your assets will be valued and where discounts may apply.
Degree of Control
Owning 51% of a company is worth more per share than owning 10%, because control carries decision-making power. Minority interests are usually valued lower per share.
Marketability of the Interest
Publicly traded shares can be sold in seconds; shares in a closely held private business cannot. That lack of liquidity reduces value and is reflected through a marketability discount.
Ownership Concentration and Relative Size
If ownership is spread across many shareholders, no single stake commands a control premium. A concentrated block may be worth more because it carries influence over the company’s direction. Swing blocks that can tip control between other owners can also carry extra value.
Family-Held Interests and IRS Scrutiny
Transfers within families get extra attention from the IRS, which looks at whether values reflect true arm’s-length terms or have been pushed down to reduce tax. Restrictions in operating or shareholder agreements are reviewed closely, and some are ignored for valuation purposes under Section 2703.
Tax Basis and Capital Gains
Assets you give away during life keep your original tax basis (carryover basis). Assets inherited at death generally receive a basis equal to their fair market value at death (stepped-up basis). That difference should be part of any decision to gift now or hold until death.
Industry and Market Conditions
The same business will be valued differently in a strong market than in a recession. Appraisers consider economic conditions, industry trends and comparable transactions as of the valuation date.
Understanding Valuation Discounts
Valuation discounts are among the most useful tools in gift and estate tax planning. Applied correctly and supported by evidence, they can reduce the taxable value of transferred interests.
Discount for Lack of Control (DLOC)
A minority owner cannot set salaries, declare distributions, sell assets or force a sale of the company. A buyer would pay less for a stake without those powers, so a discount for lack of control applies to non-controlling interests.
Discount for Lack of Marketability (DLOM)
An interest in a private company cannot be sold quickly or cheaply, and the pool of buyers is small. A buyer would pay less for that illiquidity, so a discount for lack of marketability applies. It is usually supported with restricted stock and pre-IPO studies or option-pricing models.
Other Discounts
- Blockage discounts for large blocks of public stock that would depress the price if sold at once
- Discounts for fractional interests in real estate
- Built-in capital gains tax on appreciated assets held in a corporation
Worked Example: Gifting a 20% Interest
| Step | Amount |
|---|---|
| Equity value of the whole company | $60,000,000 |
| Pro rata value of a 20% interest | $12,000,000 |
| Less: discount for lack of control at 15% | ($1,800,000) |
| Value after control discount | $10,200,000 |
| Less: discount for lack of marketability at 25% | ($2,550,000) |
| Fair market value of the gifted interest | $7,650,000 (about 36% below pro rata) |
The discounts are applied one after the other, not added together, and both percentages here are illustrative. Each must be supported by data in the appraisal report, because unsupported discounts are one of the most common reasons the IRS adjusts a gift.
Ready to Get Your Gift and Estate Valuation Right?
Talk to Countsure about an independent valuation of your business interest before you gift it or plan your estate.
The Three Core Valuation Approaches
1. Market Approach: Guideline Transaction Method
The market approach sets value by reference to prices paid in arm’s-length deals for similar businesses. The guideline transaction method looks at actual acquisitions of comparable companies, derives a multiple (most often enterprise value to EBITDA or to revenue), and applies it to the subject company. The IRS gives weight to observable market evidence, which makes well-chosen transactions persuasive.
Worked example, step 1: identify comparable transactions
| Comparable transaction | Target EBITDA | Deal enterprise value | EV / EBITDA |
|---|---|---|---|
| Transaction 1 | $8,000,000 | $56,000,000 | 7.0x |
| Transaction 2 | $10,500,000 | $84,000,000 | 8.0x |
| Transaction 3 | $6,500,000 | $42,250,000 | 6.5x |
| Median multiple | 7.0x |
Steps 2 and 3: apply the multiple, then move from enterprise value to equity value (company A, trailing twelve-month EBITDA of $9,000,000)
| Particulars | Amount |
|---|---|
| Enterprise value ($9,000,000 EBITDA × 7.0) | $63,000,000 |
| Less: debt | ($5,000,000) |
| Add: cash | $2,000,000 |
| Equity value (100% basis) | $60,000,000 |
2. Asset Approach: Adjusted Net Asset Method
The asset approach values a business at the fair market value of its assets less its liabilities. Book value shows assets at historical cost; the adjusted net asset method restates each item to current fair market value. It suits holding companies, real estate entities, investment vehicles and asset-heavy businesses, which are common in estate planning, and it often acts as a floor when reconciling with the other approaches.
Worked example: restate book values to fair market value (company B)
| Balance sheet item | Book value | Adjustment | Fair market value |
|---|---|---|---|
| Land and building | $12,000,000 | +$8,000,000 | $20,000,000 |
| Plant and machinery | $6,000,000 | ($1,500,000) | $4,500,000 |
| Inventory | $4,000,000 | ($500,000) | $3,500,000 |
| Accounts receivable | $3,500,000 | ($300,000) | $3,200,000 |
| Cash and equivalents | $2,000,000 | $0 | $2,000,000 |
| Brand and intangibles (internally developed) | $0 | +$5,000,000 | $5,000,000 |
| Total assets | $27,500,000 | +$10,700,000 | $38,200,000 |
| Less: accounts payable | ($3,000,000) | $0 | ($3,000,000) |
| Less: long-term debt | ($5,000,000) | $0 | ($5,000,000) |
| Less: deferred tax on revaluation | $0 | ($2,800,000) | ($2,800,000) |
| Adjusted net asset value (equity) | $19,500,000 | +$7,900,000 | $27,400,000 |
3. Income Approach: Discounted Cash Flow (DCF) Method
The income approach, through the discounted cash flow method, values a business at the present value of the cash flows it is expected to generate. It is the most widely used method for operating companies with predictable cash flows. Value equals the sum of each year’s free cash flow to the firm divided by (1 + WACC) raised to the power of the year, plus the discounted terminal value, where WACC is the weighted average cost of capital.
Worked example, step 1: project free cash flow for five years (company C; tax at 25% of EBIT)
| Year | Revenue | EBIT | NOPAT | Add: D&A | Less: capex | Less: change in working capital | Free cash flow |
|---|---|---|---|---|---|---|---|
| Y1 | $50,000,000 | $10,000,000 | $7,500,000 | $2,000,000 | ($3,000,000) | ($500,000) | $6,000,000 |
| Y2 | $57,500,000 | $11,800,000 | $8,850,000 | $2,200,000 | ($3,200,000) | ($550,000) | $7,300,000 |
| Y3 | $65,000,000 | $13,700,000 | $10,275,000 | $2,400,000 | ($3,400,000) | ($600,000) | $8,675,000 |
| Y4 | $72,000,000 | $15,500,000 | $11,625,000 | $2,600,000 | ($3,600,000) | ($650,000) | $9,975,000 |
| Y5 | $79,000,000 | $17,400,000 | $13,050,000 | $2,800,000 | ($3,800,000) | ($700,000) | $11,350,000 |
Step 2: discount rate. Cost of equity 15%, after-tax cost of debt 7%, equity weight 80%, debt weight 20%. WACC = (0.80 × 15%) + (0.20 × 7%) = 13.4%.
Step 3: terminal value. With long-term growth of 4%, terminal value = $11,350,000 × 1.04 ÷ (0.134 − 0.04) = $11,804,000 ÷ 0.094 = $125,574,468.
Step 4: discount to present value
| Year | Free cash flow or terminal value | Discount factor at 13.4% | Present value |
|---|---|---|---|
| 1 | $6,000,000 | 0.8818 | $5,290,800 |
| 2 | $7,300,000 | 0.7776 | $5,676,480 |
| 3 | $8,675,000 | 0.6857 | $5,948,448 |
| 4 | $9,975,000 | 0.6047 | $6,031,882 |
| 5 | $11,350,000 | 0.5333 | $6,052,955 |
| Terminal value | $125,574,468 | 0.5333 | $66,968,864 |
| Enterprise value | $95,969,429 | ||
Step 5: equity value. $95,969,429 less $5,000,000 of debt plus $2,000,000 of cash = $92,969,429, on a 100% control, marketable basis, before any discounts for the specific interest being transferred.
Choosing the Right Approach
Want to Avoid Mistakes in Your Gift or Estate Tax Valuation?
Countsure’s CPA-led valuation team prepares independent, fully documented valuations for gift and estate tax filings. Reach out through the form to discuss your situation.
Common Mistakes to Avoid
Even well-planned transfers can go wrong because of avoidable errors.
Relying on Outdated or DIY Valuations
A rough estimate or a valuation from years ago is one of the fastest ways to invite an IRS challenge. Values must be as of the date of the gift or death and reflect current conditions.
Overlooking or Overreaching on Discounts
Failing to apply supportable discounts leaves tax savings on the table; claiming discounts with no evidence invites adjustment and penalties.
Poor Documentation of Assumptions and Method
If the report cannot clearly explain how the appraiser reached the number, the IRS will not accept it. Documentation is the backbone of a defensible valuation.
Missing Filing Deadlines
Form 709 is due April 15 of the year after the gift, and Form 706 is due nine months after death, each with an extension available. Missing them brings penalties and can cost valuable elections such as portability of a deceased spouse’s unused exemption.
Not Updating Valuations After Business Changes
A funding round, an acquisition or strong revenue growth can change value substantially. A valuation done before those events will not support a gift made after them.
Ignoring State Estate and Inheritance Taxes
Federal planning is only half the picture. About a dozen states and DC have their own estate tax, often with much lower exemptions, and five states charge inheritance tax.
How to Stay Compliant During Valuation
The IRS has specific expectations for how valuations are prepared and reported, and meeting them protects you from costly disputes.
Keep Thorough Documentation
Keep records of all assumptions, comparable transactions, financial statements and correspondence with your appraiser. You may need them years later if a return is examined.
File the Right Forms on Time
| Item | Due date or rule | Notes |
|---|---|---|
| Form 709 (gift tax return) | April 15 of the year after the gift | Extended to October 15 with Form 8892 or an extension of your income tax return |
| Form 706 (estate tax return) | 9 months after the date of death | Six-month extension with Form 4768; also needed to elect portability to a surviving spouse |
| Valuation understatement penalty | 20% of the underpaid tax if the reported value is 65% or less of the correct value | 40% if the reported value is 40% or less of the correct value |
Meet the Adequate Disclosure Rules
Adequately disclosing a gift on a timely Form 709, usually by attaching a qualified appraisal that meets the IRS requirements, starts the three-year period after which the IRS can no longer challenge the value. Without adequate disclosure, the IRS can revisit the valuation at any time, even decades later, including when it reviews your estate.
When to Get a Professional Valuation
Not every transfer needs a formal appraisal, but these situations do.
Keep Thorough Documentation
Keep records of all assumptions, comparable transactions, financial statements and correspondence with your appraiser. You may need them years later if a return is examined.
Gifting a Business Interest
Larger Estates
If your estate may exceed the federal or a state exemption, valuing assets early helps you plan transfers and estimate the tax.
Trusts and Advanced Structures
Grantor retained annuity trusts (GRATs), intentionally defective grantor trusts (IDGTs) and dynasty trusts all need a supportable value for the assets placed in them.
Valuations for Other Purposes
Protect Your Estate with a Supportable Valuation
Talk to Countsure’s valuation team about your gift or estate plan. No obligation, and everything you share stays confidential.
Frequently Asked Questions
1. What is the difference between gift tax and estate tax?
Gift tax applies to transfers you make during your lifetime; estate tax applies to what you transfer at death. They share one lifetime exemption, $15,000,000 per person for 2026, and the same rates, from 18% up to 40%. Gifts within the $19,000 annual exclusion per recipient do not use up the lifetime exemption.
2. Is the estate tax exemption still dropping after 2025?
No. The 2025 tax law made the higher exemption permanent. For 2026 it is $15,000,000 per person ($30,000,000 for a married couple), and it is adjusted for inflation each year. State estate and inheritance taxes are separate and often have much lower thresholds.
3. Do I need a professional valuation for every gift I make?
No. Cash and publicly traded securities have clear values and do not need an appraisal. Gifts of business interests, real estate or other hard-to-value assets should be supported by a qualified appraisal, which is also needed to meet the IRS adequate disclosure rules.
4. How long does a gift and estate tax valuation take?
Most take four to eight weeks, depending on the complexity of the asset and the quality of the financial records. Groups with several entities or real estate holdings can take longer.
5. Can the IRS challenge my valuation after the return is filed?
Yes, but if the gift is adequately disclosed on a timely Form 709, including a qualified appraisal, the IRS generally has three years to challenge it. Without adequate disclosure, there is no time limit, and the IRS can revisit the value decades later.
6. What happens if I do not file a gift tax return?
You risk penalties and interest on any tax due, and the statute of limitations never starts, so the IRS can challenge the value at any time. A return is often required even when no tax is owed, for example when a gift to one person exceeds $19,000 or when spouses split gifts.
7. Can I use the same valuation for multiple purposes?
Usually not. A valuation is prepared for a specific purpose, standard of value and date. A gift tax valuation as of one date cannot simply be reused for a later gift, a 409A option price or a sale, although much of the underlying analysis can be updated.
8. Are valuation discounts accepted automatically by the IRS?
No. Discounts for lack of control and marketability must be supported by credible data, a recognized method and a qualified appraiser’s documentation. Unsupported or excessive discounts are a common reason the IRS adjusts gift and estate tax values.
Related Countsure Blogs
- Revenue Ruling 59-60: the eight factors behind every IRS business valuation.
- 409A Valuation Guide: valuing common stock for option grants.
- Sample 409A Valuation Report: what a full valuation report contains.
Parth Shah, Managing Director
(CPA-US, FCA, RV-S&FA, DISA)
Parth Shah who is head of Accounts and Book keeping has experience of more than 10 years. A Certified Public Accountant – US, fellow Chartered Accountant, Registered Valuer and Diploma in Information System Audit.
