Gift and Estate Valuation for Tax Purposes

You might be familiar with the words gift and estate tax because they come up frequently in conversations about taxes and asset transfers. In this context, "valuation" means determining an asset's worth for gift and estate taxes.?

As of 2023, Individuals can gift up to $17,000per recipient annually without incurring gift tax. In addition to this there is a lifetime exception of $12.92 million per individual for estate and gift taxes, allowing significant transfers without immediate tax implications.

Understanding the valuation process, including applicable discounts and regulatory requirements is crucial for individuals and families looking to manage their estates effectively.

Gift and Estate Tax Valuation

The process of valuing assets as gift and estate tax valuation occurs because the government taxes the asset based on its worth. While the basic principle of valuation remains the same, it's important to understand that it applies in different situations.?

Governments have instituted gift and estate taxes to ensure assets are taxed as they transfer hands. Typically referred to as "estate taxes" or "gift taxes," these taxes are based on the property itself rather than the transfer of ownership.?

Gifts and estate tax valuation and proper estate documents help avoid undervaluation penalties for an estate.

Planning Ahead

With the current lifetime exemption for gifts and estates set at $13.61 million per individual, as of 2024, individuals should plan their tax strategies before any changes occur in tax law, especially with provisions set to sunset after 2025.

A well-documented appraisal report is important to demonstrate compliance. It should include details of methodologies used and assumptions made and present any supporting evidence. Planning ahead for your valuation helps to reduce errors that can lead to penalties.

Valuation Discounts for Gift and Estate Tax

Valuation discounts apply primarily to closely held businesses, FLPs, and LLCs, which allow individuals to transfer wealth more efficiently while minimizing taxes. This also helps reduce the taxable value of assets transferred during a person's lifetime or at death.

Some of the common valuation discounts are,

• Lack of Marketability: Applied to assets that are not easily sold or converted to cash. Typically range from 10% to 45%, depending on market conditions.

• Lack of Control: This applies when an ownership interest does not give the holder control over the business operations and can range from 10% to 45%.

• Future Interest Discounts: These discounts apply to interests that will not provide any benefits until a future date.

Trends of Gift and Estate Tax Valuations

By 2019, this exemption amount for the estate tax had crept up to $11.4 million, while the exclusion for the annual gift tax remained at $15,000. In 2020, the estate tax exemption was raised to $11.58 million. The annual gift tax exclusion remained at $15,000. In 2021, it goes up even more, to $11.7 million, with no change in the gift tax exclusion.

As of 2022, the exemption applied to estate tax was at $12.06 million and the annual gift tax exclusion remained at $16,000. For the year 2023, it had risen to $12.92 million, with annual gift tax exclusion rising to $17,000.

Currently, the US estate exemption is at $13.61 million per person, with the exclusion of the annual gift tax being $18,000. As this exemption amount has increased over time, so have generous opportunities with regards to transferring one's wealth without huge tax implications.

Ensure Accuracy of your Gift and Estate Tax Valuation through Eqvista!

Preparing for gift and estate tax valuations requires a comprehensive understanding of valuation principles, and it should align with IRS guidelines and requires strategic planning to reduce tax liabilities. Engaging qualified professionals can help to ensure compliance and optimize financial outcomes.

Eqvista’s qualified tax consultants can help you with business valuation for estate and gift tax needs through their expertise and knowledge in valuation services . To know more, reach us today.