estate and gift tax business valuation | Art of Business Valuation

Court-Worthy Valuations: Protection from Costly Mistakes

by Greg Caruso | Sep 14, 2025 | Estate and Gift Tax Business Valuation, Technical Business Valuation Topics

An attorney or CPA should carefully review a business valuation, as it plays a critical role in various legal matters, including mergers and acquisitions, divorce proceedings, shareholder disputes, estate planning, and tax reporting.

A thorough review ensures that the valuation methodology is appropriate, the financial data is accurate, and all assumptions are reasonable and defensible. Inaccurate or poorly supported valuations can lead to unfavorable settlements, regulatory scrutiny, or costly litigation.

By carefully examining the valuation, attorneys can identify weaknesses, uncover potential risks, and provide better guidance to their clients. This diligence helps protect client interests, strengthens negotiation positions, and ensures compliance with applicable laws and professional standards.

A strong valuation:

Is written for the specific purpose using the correct Standard of Value
Demonstrates independence and objectivity.
Uses recognized methods and explains why others were not chosen.
Documents assumptions with market evidence.
Provides clear, reproducible analysis.

Red Flags to Watch For:

Overly optimistic projections.
Thin or missing documentation.
Cherry-picked data.
Discounts or premiums without explanation.
Inconsistent use of methods.
Lack of discussion of key risks.

A Cautionary Tale

An Attorney-CPA, serving as ESOP trustee, relied on a valuation from management’s accountant. The report showed a sharp increase in share value, which pleased all parties. But when company performance later fell and the Department of Labor reviewed the transaction, cracks appeared:

Aggressive growth projections with no support.
Cherry-picked comparables that inflated value.
Unexplained discounts to align with expectations.

In court, the valuation fell apart. The judge found the trustee had breached its fiduciary duty, resulting in financial penalties and reputational damage.

Lesson: A valuation is not just a number—it’s a defensible story backed by evidence.

A Positive Example

In contrast, another trustee reviewing the sale of a family-owned manufacturer questioned a valuation that assumed high growth and an unusually low discount rate. Instead of accepting it, the trustee commissioned an independent valuation.

The second report tied projections to industry benchmarks, adjusted for customer risk, and clearly explained methodology. When regulators later reviewed the sale, the valuation held up and protected the trustee’s decision-making.

Lesson: Trustees don’t need to be valuation experts, but they do need to understand business valuation, ask thorough questions and demand clarity.

It’s easy to get caught up in a valuation that looks flawless on paper, until someone asks the simple, uncomfortable question—like the child in The Emperor’s New Clothes pointing out the obvious. I’ve seen meetings where everyone nodded along to impressive charts and growth projections, only for a single pointed question to reveal assumptions that didn’t hold water. That’s the power of scrutiny: it exposes what’s real, weeds out what’s wishful thinking, and ensures decisions are based on substance, not just style.

Pro-ESOP Legislation Moves Forward

by Greg Caruso | Aug 17, 2025 | ESOP Business Valuation

Advancing Employee Ownership: A Look at Recent Senate Bills

Bipartisan support for Employee Stock Ownership Plans (ESOPs) is growing in Washington, as evidenced by two key pieces of legislation that recently moved through the Senate. Both the “Promotion and Expansion of Private Employee Ownership Act” and the “Employee Ownership Representation Act” aim to remove barriers and provide new incentives for businesses to adopt an employee-owned model.

The Promotion and Expansion of Private Employee Ownership Act of 2025

Introduced by Senators Steve Daines (R-MT) and Maggie Hassan (D-NH), this bill seeks to make it more appealing for private companies, particularly S corporations, to transition to employee ownership. Its main provisions include:

Expanded Tax Deferral: The legislation would allow owners of S corporations who sell at least 30% of their company to an ESOP to defer 100% of the capital gains taxes, a significant increase from the current 10% deferral set to take effect in 2027.
Government Support: The bill mandates the creation of an S Corporation Employee Ownership Assistance Office within the Treasury Department to provide educational and technical assistance.
Advocacy: A new Advocate for Employee Ownership position would be established within the Department of Labor (DOL) to promote employee ownership and act as a liaison between stakeholders.
Small Business Certification: The act would ensure that businesses retain their small business certifications even after an ESOP takes a controlling stake, as long as the majority of the new employee owners meet the required criteria.

You can read more about this bill here.

The Employee Ownership Representation Act of 2025

This bill, along with the “Retire Through Ownership Act,” was recently advanced unanimously by the Senate Health, Education, Labor, and Pensions (HELP) Committee, moving it closer to a full Senate vote. The legislation focuses on strengthening the institutional support for ESOPs:

ERISA Advisory Council: The bill would add two ESOP company representatives to the ERISA Advisory Council, giving the employee ownership community a greater voice in shaping federal policy.
New DOL Office: It would create a new Office of Employee Ownership within the DOL, separate from the Employee Benefits Security Administration (EBSA), to better support and promote ESOPs.
Advocate for Employee Ownership: An amendment to this bill also includes the creation of the Advocate for Employee Ownership position, which would provide guidance and work with other agencies to expand employee ownership.

To learn more about the bills advancing through the HELP committee, you can read the full article here.

Estate Planning Benefits from “One Big Beautiful Bill Act” (OBBBA 2025)

by Greg Caruso | Jul 21, 2025 | Estate and Gift Tax Business Valuation

The recently passed “One Big Beautiful Bill Act” (OBBBA 2025), which permanently increases the federal gift and estate tax exemption to $15 million per person for 2026 (and $30 million for married couples, indexed for inflation), is a game-changer for business owners’ estate planning. This legislative certainty, replacing the looming sunset of the previous higher exemption, dramatically alters strategies that were previously driven by a sense of urgency.

Here’s how higher estate/gift tax exemptions will change how business owners plan:

Reduced Urgency for “Use-It-or-Lose-It” Gifting (for some)

Previously, many business owners felt intense pressure to make large lifetime gifts before the end of 2025 to “lock in” the higher, temporary exemption amounts. With the permanent increase and continuous inflation indexing, this immediate urgency has subsided for many.

Less Pressure to Gift Right Away: Owners whose estates fall comfortably below the $15 million (or $30 million for couples) threshold may no longer feel compelled to make significant taxable gifts solely for estate tax avoidance. Their estates may now pass entirely tax-free.
More Flexibility: The pressure to rush valuations or transfer assets before year-end is largely gone. Business owners can now take a more measured approach to their wealth transfer strategies.

Strategic Shift for Ultra-High Net Worth Owners

While the new exemption is substantial, it won’t eliminate estate tax for the wealthiest business owners. Those with estates significantly exceeding $15 million ($30 million for couples) will still face federal estate tax. However, the planning strategies evolve:

Still Utilizing Full Exemptions: These owners will continue to maximize the use of their $15 million per person exemption through lifetime gifts. Gifting business interests, especially those with high growth potential, remains a powerful strategy to remove future appreciation from the taxable estate.
Focus on Discounting and Growth Assets: The value of gifts is determined at the time of transfer. Business owners will continue to use valuation discounts (for lack of marketability and lack of control) when gifting illiquid, non-controlling interests in their businesses. This allows them to transfer a greater underlying value of the business while using less of their exemption. Gifting assets expected to appreciate significantly (like a growing business) remains a cornerstone of efficient wealth transfer, as all future appreciation occurs outside the taxable estate.
Sophisticated Techniques Remain Relevant: Techniques like Grantor Retained Annuity Trusts (GRATs) and Sales to Intentionally Defective Grantor Trusts (IDGTs) will still be vital for freezing the value of appreciating business assets within the estate, transferring future growth tax-free to heirs, or creating liquidity for business succession.

Increased Focus on Income Tax Planning

With less emphasis on estate tax for many, the spotlight shifts to income tax efficiency, particularly for business owners:

Basis Planning: The new law might lead to a re-evaluation of gifting strategies versus holding assets until death to receive a “step-up in basis.” While lifetime gifts remove assets from the estate, the recipient receives the donor’s original (often low) cost basis, potentially leading to higher capital gains taxes upon sale. Assets held until death receive a basis stepped up to fair market value, potentially eliminating capital gains on appreciation. Business owners will weigh the benefits of future appreciation escaping estate tax vs. the potential for income tax on sale.
Section 199A Deduction (Pass-Through Income): OBBBA 2025 also includes a permanent 20% deduction for qualified business income for owners of pass-through entities (S-corps, partnerships, LLCs). Business owners will meticulously plan their income structure to maximize this deduction, impacting decisions around entity choice and owner compensation.
Depreciation and Expensing: The bill also includes provisions related to 100% immediate expensing for new equipment and enhanced R&D expensing, incentivizing business investment. This impacts cash flow and taxable income, which in turn influences the financial health of the business being planned for.

Greater Emphasis on Business Succession & Control

With reduced estate tax pressure, business owners can place more focus on the non-tax aspects of succession planning:

Orderly Transitions: The time and mental energy previously consumed by urgent tax planning can now be redirected to developing robust succession plans, identifying and training successors (whether family, management, or external), and structuring buy-sell agreements.
Maintaining Control: Owners who wish to transfer wealth but retain control of their business for a longer period may find more flexibility. This could involve recapitalizing the business into voting and non-voting shares, using trusts where the owner retains certain powers, or implementing carefully drafted shareholder agreements.
Philanthropic Planning: For business owners with significant wealth and charitable intent, the higher exemptions allow for more flexibility in integrating philanthropic goals into their estate plans without compromising transfers to family. Charitable giving strategies can still provide income tax deductions while reducing the taxable estate.

Continued Importance of State-Level Planning

While the federal picture is clearer, state-specific estate and inheritance taxes remain a critical concern.

State “Cliffs” and Exemptions: Many states have much lower estate tax exemptions (some with “cliff” provisions where exceeding the exemption by a small amount can make the entire estate taxable). Business owners in these states will continue to employ strategies like Spousal Lifetime Access Trusts (SLATs) or bypass trusts to maximize both spouses’ state exemptions and mitigate state-level tax exposure.

In summary, the higher, permanent federal estate and gift tax exemptions under OBBBA 2025 offer business owners unprecedented opportunities and flexibility. While it reduces the immediate urgency for some, it shifts the focus towards more strategic, long-term planning that integrates wealth transfer with income tax efficiency, robust business succession, and thoughtful control considerations. The role of experienced advisors, including tax lawyers and business valuators, remains paramount to navigate this evolving landscape.

Riding the Economic Waves: How Economic Conditions Can Capsize Your Buy-Sell Agreement

by Greg Caruso | May 19, 2025 | ESOP Business Valuation

For closely-held business owners, a buy-sell agreement is a cornerstone of succession planning and business continuity. It’s the “pre-nup” for business partners, outlining what happens if an owner departs, whether due to death, disability, retirement, or other triggering events. A critical component of these agreements is the mechanism for valuing the departing owner’s interest. But what happens when the economic landscape shifts dramatically between when the agreement is drafted and when it’s triggered?

Many business owners treat their buy-sell agreement as a “set it and forget it” document. This can be a costly mistake, especially when economic tides turn. Fluctuating economic conditions can significantly impact the fairness and feasibility of a buy-sell agreement, potentially leading to disputes, financial strain, or even the unraveling of the business itself.

Proactive Steps to Weather the Economic Storm:

So, how can business owners ensure their buy-sell agreements remain fair and functional regardless of the economic climate?

Regular Reviews are Non-Negotiable: Don’t let your buy-sell agreement gather dust. Review it annually, or at least every 2-3 years, and specifically after any major economic shift or significant change in your business.
Flexible Valuation Mechanisms: Avoid fixed values for extended periods. Consider using a formula that incorporates current financial data and perhaps industry-relevant multiples. Better yet, stipulate a process for valuation at the time of the trigger, such as an agreement to hire one or more qualified, independent business appraisers. This ensures the valuation reflects the conditions at the time of the buyout.
Multiple Funding Options & Contingencies: Regularly review life insurance coverage to ensure it aligns with the business’s current value. Consider a sinking fund or other savings mechanisms. Outline provisions for seller financing, including how interest rates will be determined (e.g., tied to a benchmark prime rate).
Consult Your “A-Team”: Work with experienced legal counsel, a CPA, and potentially a business valuation expert when drafting and reviewing your buy-sell agreement. They can help you anticipate various scenarios and build in appropriate flexibility.

A buy-sell agreement is a living document that must adapt to the evolving realities of your business and the broader economy. By proactively addressing the potential impacts of economic conditions, you can protect your business, ensure fair treatment for all own owners, and maintain the stability you’ve worked so hard to build.

Colorado Boosts Employee Ownership with New Tax Incentives

by Greg Caruso | Apr 10, 2025 | ESOP Business Valuation

Colorado is making significant strides in promoting employee ownership with a new bill that introduces substantial tax benefits and expands existing programs. Starting in 2027 and running through 2037, the legislation offers two key income tax subtractions:

Capital Gains Subtraction: Taxpayers who convert at least 20% of their qualified business to employee ownership can subtract the state capital gains realized from this conversion.
Worker-Owned Cooperative Subtraction: Worker-owned cooperatives can subtract their federal taxable income, up to $1 million.

Furthermore, the bill extends and enhances the existing tax credit for employee business ownership conversion costs. Key changes include:

Extending the credit through 2037.
Increasing the credit percentage from 50% to 75% starting in 2026.
Adjusting the annual aggregate credit limits to $3 million (2026-2031) and $4 million (2032-2037).
Expanding eligibility by revising definitions and allowing qualified support entities (nonprofits aiding conversions) to claim the credit.

These changes aim to incentivize business owners to transition to employee ownership, empower workers, and strengthen local economies by fostering a more equitable business landscape.

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