Business Valuations for Transfers of a Business Interest to a Trust

A valuation is not required in all trust transfers, but it becomes necessary in most situations involving a change in beneficial ownership or tax reporting.

Valuation May Not Be Required

• Transfer of a business interest to a revocable (living) trust where the owner retains full control
• Situations where the transfer is purely administrative and does not change economic ownership
• Estate planning structures that do not involve a taxable event

In these cases, the transfer is generally a change in title rather than a transfer of value, and a formal valuation is typically not required. If an owner still wants to know the value, a Calculation or a Valuation with a Conclusion of Value with an Oral report or Summary report may be sufficient.

Valuation Is Typically Required

• Transfers of ownership interests to an Irrevocable Trust: If you are using an Irrevocable Trust to remove assets from your taxable estate, a certified valuation is practically mandatory. While you can technically sign an assignment of interest without one, doing so leaves the potential for tax liabilities. Under Treasury Reg. §301.6501(c)-1(f), a gift is only considered “adequately disclosed” if it is supported by a valuation from a qualified appraiser. Without this disclosure, the IRS’s three-year statute of limitations never starts. This means the IRS could challenge the 2026 value of your business in 2040, leading to massive back taxes, interest, and penalties. The most common types of irrevocable trusts are:

• • IDGT (Intentionally Defective Grantor Trust): Often used for “selling” a business interest to a trust in exchange for a promissory note. We must establish a precise Fair Market Value to ensure the sale price is defensible and doesn’t trigger an unintentional gift tax.
  • GRAT (Grantor Retained Annuity Trust): These are time-sensitive “term” trusts. The valuation determines the exact amount of the annuity payments that must flow back to the grantor.
  • Charitable Trust Structures (CRT / CLT): For transfers involving philanthropic goals, see our dedicated page on Charitable Contributions of Business Interests.
  • Other Irrevocable Trusts: Irrevocable Gift Trust (basic family trust), SLAT (Spousal Lifetime Access Trust), GST Trusts (Generation-Skipping Trusts), ILIT (Irrevocable Life Insurance Trust).

• FLP (Family Limited Partnership) or LLC: In an FLP, the parents (General Partners) typically own only 1% or 2% of the entity but have 100% of the control. They decide when to distribute cash, how to invest assets, and how to run the daily operations. The children or a trust for their benefit typically own the remaining 98% or 99% of the economic value but have 0% control. They cannot force a payout, fire the GP, or sell their “shares” to outsiders without permission. In these cases, interestingly, a 98% interest may qualify for a Discount for Lack or Control, besides any marketability considerations. A FLP is not a trust, but it is an alternative your attorney or Tax advisor may suggest.

In these cases, a defensible valuation is necessary to support the reported value and to withstand potential review by tax authorities. The appropriate engagement is a Valuation with a Conclusion of Value and a Detailed Report.