Here’s the scenario. One of your parents dies and they own a business. Should you value the business for their estate? Maybe. I want to lay out the case for giving this a closer look.
Family Disputes
I’ve worked with a lot of executors and trustees, and I’ve seen these:
- The business is usually one of many assets.
- The business is often the most difficult asset to value.
- The business may be the most valuable asset in the estate or it might be worth nothing.
- The more beneficiaries, the more likely there will be conflicts.
- If the business isn’t valued by a professional, someone will guess the value.
- Guesses lead to fights and mistakes that cost time and money.
A good business appraiser should put value disputes to rest. It will also help you correctly allocate and distribute assets consistent with your family member’s will or trust.
Estate and Income Taxes
While it’s common today for many estates to be under the Federal estate tax exemption and not be required to file a Form 706, state estate or inheritance tax can be another story. You cannot accurately make Federal or state estate tax determinations if you don’t have values for all the assets and liabilities, including the business. The risk from unpaid estate taxes, interest, and penalties usually extends to the beneficiaries indefinitely. That means your personal assets are at risk if the proper filings and payments aren’t made.
Whether the business is retained or sold, income taxes after death are often computed based on the value of the business at death. Stated another way, without a business valuation, you will often be unable to estimate anyone’s tax basis in the business on the date of death. This can become particularly complex if the business is retained by multiple beneficiaries after death. A surviving spouse and children who continue to own the business usually add more complexity.
Parting Thoughts
Hiring a qualified business appraiser will cost money, but it’s important to consider your risks of not hiring one. Consult an attorney and a business appraiser, both with significant business estate experience. This meeting should be conducted with both professionals. After meeting and reviewing documents, they can recommend how to proceed. By the way, it’s a great idea to have these meetings before your business-owning family member passes away. Your family member can then update estate documents to match their wishes before it’s too late.
Josh Horn, CPA, CVA
Horn Valuation
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