Gift & Estate Tax Valuations: Plan with Confidence

Valuation for estate and gift tax purposes is based on the fair market value standard, what a willing buyer would pay a willing seller in an arm’s-length transaction. Common valuation methods include:

• Income Approach: such as discounted cash flow (DCF), used when the asset generates projected future income

• Market Approach: based on comparable company or transaction data

• Asset-Based Approach: typically used for holding companies or asset-heavy entities

In many cases, estate and gift tax valuations also apply discounts for lack of control (DLOC) and lack of marketability (DLOM) to reflect real-world constraints on liquidity and transferability.

Accurate valuation is essential for effective estate planning. It ensures that ownership transfers, whether via gifts, trusts, or inheritance, are:

• Properly reported to the IRS

• Fairly structured to reflect true economic value

• Tax-efficient under current exemption thresholds

A credible valuation helps to:

• Minimize audit risk and avoid valuation disputes

• Support lifetime gifting strategies and exemption optimization

• Enable succession planning and intra-family transfers

• Ensure compliance with IRS Form 709 (gift tax) and Form 706 (estate tax)

A valuation is required when gifting or transferring interests in privately held businesses, real estate, or illiquid assets that may be subject to estate or gift tax. Specifically:

• Form 709: Filed to report taxable gifts during one’s lifetime.

• Form 706: Filed to report the value of an estate at death.

In both cases, the IRS requires a qualified appraisal to support the fair market value reported.

 Gift tax valuation is based on the fair market value of the asset on the date of transfer. For closely held businesses, this process typically includes:

• Selecting the appropriate valuation method (income, market, or asset-based)

• Analyzing ownership structure, cash flows, and comparables

• Applying discounts for lack of control and marketability (DLOC/DLOM)

• Documenting all assumptions and sources with market-based support

Valuations should be refreshed whenever there is a material change in:

• Ownership (like new gifts or redemptions)

• Company performance or capital structures

• Estate freezes, recapitalizations, or reorganizations

• Planned transactions (such as buy-sell agreements or secondary sales)

For gift tax purposes, valuations are generally considered current if completed within 30–90 days of the transfer.

Redwood advises clients and their advisors on the ideal timing and update frequency to ensure every valuation remains accurate, timely, and IRS-compliant.

Estate tax applies to the transfer of wealth after death, while gift tax applies to certain transfers made during one’s lifetime. Both rely on fair market value at the time of transfer to assess potential tax liability.

For a more comprehensive breakdown, check out our article on this topic here.

A valuation is needed when transferring interests in private businesses, family partnerships, real estate, or other complex assets. These valuations are required to:

• Comply with IRS filing rules

• Support discounting strategies (DLOC, DLOM)

• Establish the fair market value for taxable reporting

Valuation serves as the foundation of gift and estate tax compliance. A qualified valuation:

• Establishes the fair market value of transferred interests

• Supports discounts for lack of control and marketability, when appropriate

• Documents the rationale for value conclusions in case of IRS audit

While valuation does not determine tax outcomes directly, it provides the evidentiary support needed to defend the taxpayer’s position.