Business Valuation for Estate Administration and Tax Reporting (Including IRS Form 706)
On this page, we address how Business Valuations contribute to settling estates and support IRS Form 706 reporting, including when a filing is required and how valuations affect both tax compliance and beneficiary outcomes.
The Definitive Benchmark for Estate Settlement
When a business owner passes away, the valuation of closely held business interests often becomes one of the most consequential components of estate administration and estate tax reporting. For federal estate tax purposes, business interests must be reported at Fair Market Value as of the decedent’s date of death (or the alternate valuation date, if elected) and are subject to scrutiny by the Internal Revenue Service.
Gato Consulting provides Business Valuation services in Rochester, Syracuse, Utica, Albany, and most areas in Upstate NY.
Why a Business Valuation Matters to an Estate
An estate may need to determine the fair market value of a closely held business interest owned by the person who died. The valuation generally addresses the interest owned at death, rather than the separate interests beneficiaries may later receive.
If an estate-tax return is filed, the business interest is generally valued as of the date of death, unless a valid alternate valuation election applies. Even without a tax filing, a valuation may help the administrator and beneficiaries make informed decisions about a sale, distribution, or the value assigned to inherited property.
When Estate-Tax Returns May Be Required
Federal Form 706
For a U.S. citizen or resident who dies in 2026, IRS Form 706 is generally required when the gross estate, plus adjusted taxable gifts and any applicable specific exemption, exceeds $15 million. The filing threshold is based on the estate as a whole, not just the value of the business.
An estate below that threshold may also file Form 706 to elect portability, which allows a surviving spouse to use the deceased spouse’s unused federal estate-tax exclusion. Whether a return is required, or advisable for portability, should be determined with the estate’s attorney and tax advisor. Source: IRS Form 706 instructions.
New York Estate Tax
New York has a separate estate tax. For a New York resident who dies in 2026, a New York estate-tax return is generally required when the federal gross estate plus New York includible gifts exceeds $7.35 million. An estate may therefore need a New York return even when federal Form 706 is not required. The thresholds and rules should be checked for the applicable year of death. Source: New York State Department of Taxation and Finance
An estate below that threshold may also file Form 706 to elect portability, which allows a surviving spouse to use the deceased spouse’s unused federal estate-tax exclusion. Whether a return is required, or advisable for portability, should be determined with the estate’s attorney and tax advisor. Source: IRS Form 706 instructions.
When a Valuation Is Needed
When an estate-tax return reports a material closely held business interest, its value should have support appropriate to the interest and the circumstances. The return does not automatically require a report called a “Detailed Report.” The analysis and documentation must, however, be sufficient to explain and support the reported value.
For a significant business interest, a complex ownership structure, or an estate where the value may be disputed, Gato Consulting generally recommends a Valuation Engagement with a Conclusion of Value documented in a Detailed Report. This provides room to explain the financial analysis, methods, assumptions, and adjustments underlying the conclusion.
If neither a federal nor a New York estate-tax return is required, a formal valuation may still be useful when a business will be sold, distributed among beneficiaries, or relied on to document inherited property’s income-tax basis. The appropriate scope depends on how the estate intends to use the conclusion.
Valuation Date and Fair Market Value
Federal estate-tax rules generally require property included in the gross estate to be reported at Fair Market Value as of the date of death. Revenue Ruling 59-60 provides foundational guidance for valuing closely held business interests, including consideration of the company’s financial condition, earnings, industry, management, and comparable investments.
Alternate Valuation Date
Under IRC §2032, an executor may elect alternate valuation only if it reduces both the value of the gross estate and the applicable estate and generation-skipping transfer taxes. The election applies to the estate as a whole; it cannot be made solely for a business whose value declined.
Property still held six months after death is generally valued on that date. Property sold or distributed during those six months is generally valued on the earlier disposition date. Counsel and the tax advisor should determine whether the election is available and beneficial before alternative valuation dates are incorporated into the engagement.
Income-Tax Basis of Inherited Property
The basis of inherited property is generally its fair market value at the date of death, although exceptions and special elections can change that result. When Form 706 is required, additional rules may require a beneficiary’s basis to be consistent with the estate-tax value reported. A documented valuation can therefore remain useful long after estate administration is complete. Source: IRS Publication 551
Common Business Valuation Issues
The facts that matter vary by business and ownership interest. They may include:
- The size of the interest owned at death, voting rights, and governing agreements
- Restrictions on transferring an interest
- Dependence on the deceased owner or another key person
- Real estate and other assets that require separate consideration
- The business’s financial records and expected future earnings
- Whether a Discount for Lack of Control or Discount for Lack of Marketability is appropriate
These issues can also affect estate administration and tax elections. Coordination among the valuation analyst, estate counsel, and tax advisor helps ensure that each professional is working from the same ownership facts, valuation date, and intended use.
Working with Executors and Counsel
Gato Consulting prepares business valuations for estate administration, estate-tax reporting, and potential review by courts or tax authorities. Each engagement defines the interest being valued, the valuation date, and who is expected to use the report.
Material errors in a filed estate-tax return can lead to additional tax, interest, and, when statutory conditions are met, accuracy-related penalties. A documented valuation provides the estate and its advisors with a clear explanation of how the business value was determined.
Need a valuation for an estate? Contact Gato Consulting to discuss the business interest, intended use, and appropriate scope of work.
Estate-tax filing decisions and legal matters should be addressed with the estate’s attorney and tax advisor.
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