Valuation can be useful estate planning tool

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A professional valuation is necessary for more than just business sales or purchases. Valuations are also essential tools in estate planning. |ret||ret||tab|

If a senior citizen is involved in estate planning, the goal is probably to pass as much to the heirs as possible while minimizing the estate tax burden.|ret||ret||tab|

A valuation can help reduce the chances of facing unexpected tax results or IRS penalties. The IRS may penalize businesses for several reasons, including undervaluation, lack of documentation or failure to pursue all relevant approaches to value-cost, income and market.|ret||ret||tab|

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Cover all the bases|ret||ret||tab|

Although many business owners use formulas or rules of thumb to estimate their businesses' value, this can be risky. For instance, a small-business owner may base his or her company's stock prices on the business' average earnings over a period of years, using either a weighted or simple average. |ret||ret||tab|

But this may not cover all the bases, and a business owner typically doesn't have the requisite training and skills to perform an adequate valuation.|ret||ret||tab|

The fact is that a business valuation won't stand up without all the components. To arrive at a reasonably accurate final number, a professional valuator must consider cost, income and market data, though one or more methods may be eliminated if inappropriate to the situation. Failure to consider all potential factors without a valid explanation can result in an IRS challenge.|ret||ret||tab|

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What is your interest?|ret||ret||tab|

When an estate planning strategy involves a business valuation, you need to be very clear about the business interest being valued. Commissioning a valuation of the entire company, then arbitrarily dividing it into segments, could distort the results and leave heirs facing substantial unplanned consequences.|ret||ret||tab|

These consequences can stem from the change in per-share value if a business is divided among several children rather than only one. This is because the value of a minority interest reflects different discounts from the pro rata value of a majority interest.|ret||ret||tab|

The potential of a swing vote situation, where a third small shareholder can influence a company's decisions when two large shareholders disagree, may also affect the value of any shares you are giving to family members.|ret||ret||tab|

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An effective tool|ret||ret||tab|

A professional valuation can be an effective planning tool for estates that include a business interest helping to build a sound financial foundation for you and your heirs.|ret||ret||tab|

|bold_on|(Tom Beisner, CPA, CVA, is a partner with the certified public accounting and business advisory firm of Whitlock, Selim & Keehn LLP.) |bold_on||ret||ret||tab|

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