Article
Tips for how to factor your business interests into estate planning
Oct. 23, 2019 · Authored by Calvin Swartley
Privately owned business interests can complicate estate planning, often requiring an independent, outside professional to help determine business value to comport with IRS filing requirements. Even without privately owned business interests, estate planning can be a complex process that requires individuals to consider current tax laws, family dynamics, and the size of the estate as well as the circumstances of the business and its owners.
However, taking certain steps and reviewing certain factors can help individuals ease the estate-planning process.
Personal balance sheets and appraisals
To start the estate-planning process, individuals can create a personal balance sheet by determining which assets are easy to value and which require an independent appraisal. In the absence of formal appraisals, owners can look to tax-assessed values or opinions from brokers to establish preliminary values.
Business interests, which are harder to value, can make it more challenging to equally or fairly divide assets between heirs. This is because individuals need to determine which assets are personally held and which are part of a business structure before they can be assigned to an heir.
Appraisal methodology
There are typically three approaches that business appraisers use to value a privately held business interest:
- Income Approach. In this approach, estimated future returns are discounted to present value at an appropriate rate of return for the investment.
- Market Approach. This approach utilizes valuation ratios derived from market transactions involving companies that are similar to the subject business. Past transactions involving the subject business, if any, are also considered.
- Asset-Based Approach. In this approach, the assets and liabilities of the business are restated from historical cost to fair market value.
Appraisers can also apply different valuation methodologies based on whether the interest is an operating- or holding-company interest. It’s also important to consider future prospects for a business including potential capital reinvestment needed to support growth.
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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
