Estate vs. Gift Tax: What Advisors Need to Know About Valuation, Strategy, and Compliance
When it comes to estate and gift tax planning, valuation plays a pivotal role, yet it’s often misunderstood or overlooked. Whether you are advising a high-net-worth individual, structuring a family transfer, or preparing for IRS review, getting the value right is essential.
This guide breaks down the differences between estate and gift tax, explains why accurate valuations matter, and outlines the methodologies and strategies that support tax efficiency and compliance.
Key Differences Between Estate Tax and Gift Tax
Estate and gift taxes are both imposed on the transfer of wealth, but they apply in different contexts. Estate tax is assessed on the value of a person’s assets upon death, while gift tax applies to certain transfers made during life that exceed allowable exclusions. These include the annual exclusion, which allows up to $18,000 per recipient in 2025, and the much larger lifetime exemption, which is $13.99 million per individual in 2025. The lifetime exemption is unified across both gift and estate taxes, meaning taxable gifts made during life reduce the exemption available at death..
While both taxes aim to regulate the untaxed transfer of significant wealth, they come with distinct reporting requirements, thresholds, and timing considerations. Accurate valuation ensures that transfers are properly documented and reported at fair market value, whether made during life or at death, and is essential for audit readiness and compliance.
Why Accurate Valuation Is Critical in Estate and Gift Tax Planning
The IRS requires that transfers, whether via gift or inheritance, be reported at fair market value. However, “value” isn’t always straightforward, particularly for privately held businesses, family partnerships, or intangible assets.
An imprecise or unsupported valuation can trigger IRS scrutiny, lead to the disallowance of discounts, and result in audits, penalties, or litigation. A defensible valuation prepared by a qualified appraiser, such as Redwood Valuation, not only satisfies compliance requirements but also protects advisors and their clients from downstream issues.
Common Valuation Methods Used in Estate and Gift Tax Appraisals
There is no one-size-fits-all approach to valuation. The method selected depends on the type of asset, the nature of the transfer, and the intended use of the report.
Income Approach: Values the asset based on the present value of anticipated earnings or cash flow, often used for operating businesses or entities with predictable income.
Market Approach: Uses comparable public or private transactions to benchmark value. This is helpful when reliable comps exist and can be adjusted to reflect control or liquidity differences.
Asset or Cost Approach: Calculates value based on the fair market value of underlying assets minus liabilities. Most commonly used for holding companies or investment entities.
Each method must be backed by data, justified assumptions, and an understanding of IRS expectations, especially under Revenue Ruling 59-60.
Valuation as a Compliance Anchor in Estate and Gift Planning
Valuation isn't just a planning tool. It’s a compliance cornerstone. The IRS requires that estate and gift transfers be reported at fair market value, and that value must be supported by sound methodologies, well-documented assumptions, and clear alignment with the nature of the transfer. Without this foundation, even well-structured estate plans may face scrutiny, delays, or penalties.
. While estate and gift tax valuations often involve discounts for lack of control or marketability where appropriate, there are also situations in which a higher valuation may be both appropriate and beneficial for compliance. For example, a higher valuation can help establish a step-up in basis, ensuring that any future sale of the asset reflects an accurate and audit-ready cost basis. In the case of charitable contributions, the IRS requires a qualified appraisal to substantiate the deduction and support the reported value. For first-spouse-to-die estates that fall below the exemption threshold, a well-supported valuation can help document the basis for future estate or income tax reporting.
In every instance, the goal is not simply to optimize tax outcomes but to ensure that every valuation stands up to regulatory review. Redwood’s team works alongside estate planners and CPAs to support these structures with valuation reports designed to withstand IRS examination.
Understanding the Implications of the “One Big Beautiful Bill”
On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA) into law, significantly reshaping and providing visibility to federal estate and gift tax planning. Among its hundreds of provisions, a key change solidifies the lifetime estate, gift, and Generation-Skipping Transfer (GST) tax exemptions.
Effective for gifts and decedents dying after December 31, 2025, the exemption is permanently set at $15 million per individual (and $30 million per married couple), indexed for inflation annually. This cements, rather than expires, what was previously a temporary increase under the 2017 Tax Cuts and Jobs Act, alleviating the uncertainty planners faced with the 2026 sunset.
The GST exemption is likewise permanently aligned with the $15 million threshold, ensuring trust and skip-generation transfer planning receives the same benefit. Notably, the 40% federal tax rate on amounts above the exemption remains unchanged.
The permanency of the increased exemption amount gives high-net-worth individuals and families greater confidence in long-term estate planning. It supports more aggressive lifetime gifting strategies, facilitates trust design, and establishes clearly defined portability thresholds, without the looming threat of future legislative reversals.
Conclusion
Effective estate and gift tax planning begins with thoughtful, well-documented valuation. An independent appraisal from qualified professionals, such as the team at Redwood, can provide the foundation for compliant reporting, support positions in the event of IRS review, and contribute to a sound overall wealth transfer strategy.
Learn more about our gift and estate valuation services here.