For estate tax purposes, business shares are valued at their Fair Market Value (FMV) on the date of the owner’s death. This isn’t the price you paid or what you think it’s worth; it’s a specific, hypothetical price that a willing buyer would pay a willing seller, with neither under pressure and both knowing all the relevant facts.
The primary conflict arises from a foundational IRS document, Revenue Ruling 59-60. This rule demands a valuation based on a deep analysis of facts, but for a private business with no public stock price, there are no easily observable facts. This creates a huge gray area where the value becomes a matter of professional opinion, often leading to costly disputes with the IRS and penalties that can reach as high as 40% of the tax owed.
This issue is critical for a huge number of families. While about 90% of the 21 million businesses in the U.S. are family-owned, a staggering 80% of them fail to successfully transition to the second generation. A major cause of this failure is the unexpected and often crippling burden of estate taxes, which can force a sale of the very business the family hoped to preserve.
Here is what you will learn to protect your family and your business:
- 📜 You will understand the IRS’s official rulebook, Revenue Ruling 59-60, and the eight factors that every valuation must consider to be taken seriously.
- ✂️ You will discover how valuation “discounts” work and why they are the most powerful tool for legally reducing your estate tax bill, sometimes by 30-50% or more.
- ⚖️ You will learn from the expensive mistakes of other business owners through real-life court cases that show what the IRS challenges and how judges rule on different types of businesses.
- 🚨 You will identify the ticking time bomb in many succession plans—the entity-purchase buy-sell agreement—and learn how a 2024 Supreme Court decision completely changed the rules.
- 🛡️ You will get a step-by-step guide on how to hire the right expert and build a bulletproof valuation that can withstand an IRS audit, saving your family money, time, and stress.
The People, The Rules, and The Goal
Who Are the Key Players in the Valuation Game?
Valuing a business for estate tax isn’t a solo activity. It involves a small cast of characters, each with a very different role and motivation. Understanding who they are is the first step to navigating the process successfully.
The Business Owner is the person whose life’s work is being valued. Their main goals are to see their business continue, provide for their family, and minimize the massive tax bill that can threaten to undo everything they’ve built. Their biggest fear is that the IRS will force their heirs to sell the company just to pay the taxes.
The Heirs are the family members, often children, who are set to inherit the business. They may be active in the company or completely uninvolved, which can create tension. Their primary goal is a fair and equitable distribution of assets, but family dynamics can complicate what “fair” really means.
The Internal Revenue Service (IRS) is the government agency responsible for collecting estate taxes. Their goal is to ensure the business is valued at the highest defensible amount to maximize tax revenue. They will scrutinize the valuation report for any weakness, unsupported assumption, or procedural flaw.
The Qualified Appraiser is the independent expert hired to determine the business’s value. They must have special credentials, like an ASA (Accredited Senior Appraiser) or ABV (Accredited in Business Valuation), and their role is not to be an advocate for a low value, but to produce an objective, well-documented, and defensible opinion of value that follows professional standards.
The Only Definition That Matters: Fair Market Value
When it comes to federal estate and gift taxes, there is only one standard of value: Fair Market Value (FMV). The IRS has a very specific definition for this term, and every part of it is important.
FMV is “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of the relevant facts.” This definition creates a hypothetical situation.
It doesn’t matter what a specific person, like your biggest competitor or your own child, would pay. The valuation must assume a theoretical buyer who is purely financial and intends to continue the business as-is, not a “strategic” buyer who might pay more for special advantages. This levels the playing field and focuses the valuation on the business itself.
This standard also ignores any personal attachment or special value to the owner. For example, if a father sells his business shares to his daughter for $1, the IRS will ignore that price and assess a gift tax based on the full Fair Market Value of those shares.
The Official Playbook: IRS Revenue Ruling 59-60
Because valuing a private company is so subjective, the IRS created a guide to bring order to the process. IRS Revenue Ruling 59-60, issued in 1959, is still the foundational document for all defensible business valuations for tax purposes.
The ruling makes one thing perfectly clear: there is no single formula to value a business. Instead, it requires a comprehensive analysis of all relevant facts and circumstances, guided by eight specific factors that must be considered. An appraisal that fails to address these factors is an open invitation for an IRS challenge.
| Factor from Rev. Rul. 59-60 | What It Means in Simple Terms |
| 1. Nature and History of the Business | What does the company do? Is it stable or risky? You need to look at its products, management, and track record. |
| 2. Economic and Industry Outlook | How is the overall economy doing? What about the specific industry the business is in? A company in a growing industry is worth more than one in a declining one. |
| 3. Book Value and Financial Condition | What do the company’s financial statements say? This is just a starting point, as “book value” is rarely the same as fair market value. |
| 4. Earning Capacity | How much money does the company make? This is often one of the most important factors, looking at past profits to predict future earnings. |
| 5. Dividend-Paying Capacity | How much cash could the company pay out to its owners? This isn’t about what it has paid, but what it can pay. |
| 6. Goodwill and Other Intangibles | Does the business have value beyond its physical assets? This includes things like brand name, customer loyalty, and reputation. |
| 7. Prior Sales of Stock | Has any of the company’s stock been sold recently? If so, those sales must be examined to see if they were at arm’s length and are relevant. |
| 8. Market Price of Comparable Stocks | What are publicly traded companies in the same industry worth? This involves comparing your private company to public ones, with adjustments. |
The Three Roads to Value: How Appraisers Calculate the Magic Number
A qualified appraiser must consider three different ways of looking at a business’s value. They don’t just pick one; they analyze all three and then decide which are the most reliable for that specific company, explaining their reasoning in detail. This system of checks and balances is crucial for creating a defensible valuation.
The Asset-Based Approach: What Are the Pieces Worth?
The Asset-Based Approach (also called the Cost Approach) values a business based on the principle of substitution. A smart buyer wouldn’t pay more for a business than it would cost to build a similar one from scratch. The calculation is simple in theory: Fair Market Value of Assets minus Fair Market Value of Liabilities.
The most common method here is the Adjusted Net Asset Method. An appraiser starts with the company’s balance sheet but adjusts every single line item from its historical “book value” to its current fair market value. This can be a huge undertaking, sometimes requiring other specialists like real estate or equipment appraisers.
This approach works best for certain types of companies, like real estate holding companies or farms, where the value is tied directly to the tangible assets. It’s also used for struggling companies that might be worth more dead than alive (in liquidation). For most healthy, profitable businesses, this method usually just sets a “floor” value, because it’s bad at capturing the value of intangible assets like brand reputation or a skilled workforce.
The Income Approach: What Is the Future Worth Today?
The Income Approach is based on a simple idea: a business is worth the future income it will generate for its owner. This is often the most important approach for profitable operating companies because it focuses directly on what they are designed to do: make money.
There are two main methods used:
- Capitalization of Earnings: This is used for stable, mature companies with predictable profits. It takes a single, representative year of earnings and divides it by a “capitalization rate” to get a value. The capitalization rate is essentially the rate of return an investor would demand for that level of risk.
- Discounted Cash Flow (DCF): This is a more flexible method used for companies with less predictable growth, like startups. The appraiser projects the company’s cash flows for several years into the future (usually 3-10 years) and then “discounts” them back to what they are worth today. The discount rate is the most critical and debated part of this method, as it quantifies the risk of the business not meeting those future projections.
The Market Approach: What Are Similar Businesses Selling For?
The Market Approach also works on the principle of substitution. It determines a business’s value by comparing it to similar businesses that have recently been sold. It’s a crucial reality check against the more theoretical Income Approach.
The two methods here are:
- Guideline Public Company Method: The appraiser identifies publicly traded companies that are in the same industry and calculates valuation multiples for them (like a Price-to-Earnings ratio). These multiples are then adjusted and applied to the private company’s earnings to estimate its value.
- Guideline Transaction Method: Instead of public companies, this method looks at the sale prices of entire private companies in the same industry. It derives multiples from these real-world M&A deals and applies them to the subject company.
The biggest challenge with the Market Approach is finding companies that are truly comparable. Using the valuation multiples of a giant like Starbucks to value a local coffee shop would be a fatal flaw unless massive, well-supported adjustments were made to account for differences in size, growth, and risk.
| Valuation Approach | How It Works | Best For… | |—|—| | Asset-Based Approach | Calculates value based on the fair market value of the company’s assets minus its liabilities. | Asset-heavy businesses like real estate holding companies or farms, and companies facing liquidation. | | Income Approach | Projects the company’s future earnings or cash flows and discounts them back to their present value. | Profitable, stable operating businesses, especially service companies where intangible value is high. | | Market Approach | Compares the business to similar public companies or to private companies that have recently been sold. | Industries where there is a lot of public data or M&A activity available to make comparisons. |
The Secret to Lowering Your Estate Tax: Understanding Valuation Discounts
One of the most important—and most fought over—parts of a business valuation is the application of discounts. A 10% ownership stake in a company valued at $10 million is almost never worth $1 million for tax purposes. It’s worth significantly less, and these discounts are the reason why.
These are not loopholes; they are legitimate, court-accepted adjustments that reflect the economic realities of owning a piece of a private company.
The Discount for Lack of Control (DLOC)
The Discount for Lack of Control (DLOC) is applied to a minority interest in a business. It reflects the fact that a minority owner can’t control the company’s decisions. They can’t force the company to pay a dividend, hire or fire the CEO, or decide to sell the business.
This lack of power makes the shares less attractive to a potential buyer. A buyer would pay a premium for control, so it’s logical that they would demand a discount for a lack of control. The DLOC is often calculated based on studies of real-world acquisitions where a “control premium” was paid. The DLOC is the mathematical inverse of that premium.
The Discount for Lack of Marketability (DLOM)
The Discount for Lack of Marketability (DLOM) reflects another simple truth: it is very difficult to sell shares in a private company. There is no public stock exchange where you can sell your shares in a matter of days.
Finding a buyer for a private business interest can take months or even years, with significant costs and no guarantee of a sale. This illiquidity is a major risk for an investor. The DLOM quantifies how much a buyer would reduce the price to compensate for the fact that their money could be tied up for a very long time. Appraisers quantify this discount using data from studies of restricted public stocks or private sales that happened just before a company’s IPO.
How Discounts Are Applied: A Step-by-Step Example
It is critical to understand that discounts are applied sequentially, not added together. The DLOM is applied to the value after the DLOC has already been taken.
Let’s look at an example for a 10% minority interest in a company with a total value of $10,000,000.
| Step | Calculation |
| 1. Start with Pro-Rata Value | 10% of $10,000,000 = $1,000,000 |
| 2. Apply DLOC (e.g., 20%) | $1,000,000 – (20% of $1,000,000) = $800,000 |
| 3. Apply DLOM (e.g., 30%) | $800,000 – (30% of $800,000) = $560,000 |
| Final Taxable Value | The taxable value of the 10% interest is $560,000, not $1,000,000. |
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This example shows how proper application of legitimate discounts can reduce the taxable value of a business interest by over 40%. This is often the primary motivation for creating structures like Family Limited Partnerships (FLPs), which are specifically designed to create ownership interests that legally qualify for these powerful discounts.
Real-World Battlegrounds: How the IRS and Courts Treat Different Businesses
The rules of valuation are not applied in a vacuum. Decades of court cases show how these principles play out in the real world for different types of companies. Understanding these precedents is key to building a valuation that will hold up.
Scenario 1: The C-Corporation and Its Hidden Tax Bill
C-Corporations have a major drawback: double taxation. When the corporation sells an appreciated asset, it pays corporate tax. When the remaining cash is distributed to the owners, they pay personal income tax on the dividends. This future tax liability on appreciated assets is called the Built-In Gains (BIG) tax.
For years, the IRS argued this tax shouldn’t be deducted from the company’s value unless a sale was about to happen. The landmark case Estate of Dunn v. Commissioner settled this issue in favor of taxpayers. The court ruled that when using an asset-based valuation, you must assume the assets are sold, making the BIG tax a 100% certainty. Therefore, the full amount of the future tax must be subtracted dollar-for-dollar from the company’s value.
| Action | Consequence |
| Valuing a C-Corp’s assets without deducting the future tax on them. | The IRS will accept this value, but you are paying estate tax on a “phantom” value that doesn’t exist in reality. The company is worth much less because of the locked-in tax bill. |
| Deducting the full, dollar-for-dollar Built-In Gains tax liability. | The company’s value is significantly reduced, lowering the estate tax. Following the Dunn case, this is a legally defensible position that reflects economic reality. |
Scenario 2: The S-Corporation and the “Tax Affecting” Fight
S-Corporations are “pass-through” entities, meaning they don’t pay corporate income tax. Instead, the profits “pass through” to the shareholders, who pay the tax on their personal returns. This creates a valuation puzzle: when valuing an S-Corp using an income approach, should you pretend it pays corporate taxes to make it comparable to the public C-Corps used for data? This is called “tax affecting.”
The IRS officially hates tax affecting, arguing that the pass-through status is a benefit that increases the company’s value. For a long time, courts agreed, starting with the Gross v. Commissioner case in 1999.
However, more recent cases like Kress v. United States have shown that courts are now willing to accept tax-affecting if the appraiser provides a strong, convincing rationale for why a hypothetical buyer would factor in the shareholder-level taxes when pricing the company. The door is no longer slammed shut, but you need an expert who can build a very strong argument.
| Action | Consequence |
| Not “tax affecting” an S-Corp’s earnings in the valuation. | This follows the official IRS position and avoids a direct challenge on that point. However, it may result in a higher valuation and more estate tax. |
| “Tax affecting” the S-Corp’s earnings with a strong, documented reason. | This will likely be challenged by the IRS. However, recent court cases show that if the appraiser’s reasoning is persuasive, the court may accept it, resulting in a lower valuation. |
Scenario 3: The Family LLC and Maximizing Discounts
For Family Limited Partnerships (FLPs) and Limited Liability Companies (LLCs), the main event is almost always about the size of the valuation discounts. A key case, Pierre v. Commissioner, was a huge win for taxpayers.
The IRS argued that a single-member LLC holding only cash and stocks should be disregarded, meaning the gift was of the assets themselves, with no discounts allowed. The Tax Court disagreed, ruling that state law creates a legal LLC entity separate from its assets. Therefore, the gift was an LLC interest, which is illiquid and qualifies for a lack of marketability discount.
Another case, Estate of Warne v. Commissioner, showed that even a majority interest might get a small discount for lack of control if it doesn’t have absolute unilateral power. However, the case also established a “charitable mismatch”: an estate had to include the full, undiscounted value of an LLC, but the charitable deduction for gifting that LLC in pieces was limited to the sum of the discounted values of those pieces.
| Action | Consequence |
| Gifting cash or stocks directly to heirs. | The gift is valued at 100% of its face value. No valuation discounts are possible. |
| Placing cash or stocks into a properly formed LLC and then gifting LLC interests. | The gift is of an illiquid, non-controlling entity interest. Following the Pierre case, this makes the gift eligible for significant valuation discounts, legally reducing its taxable value. |
The Supreme Court Just Blew Up Your Buy-Sell Agreement: The Connelly Decision
In June 2024, the U.S. Supreme Court issued a unanimous ruling in Connelly v. United States that fundamentally changed the landscape for one of the most common business succession tools. This decision affects countless businesses and requires immediate attention from business owners and their advisors.
A buy-sell agreement is a contract that dictates what happens to a departing owner’s shares. A very common type is an “entity-purchase” or “redemption” agreement, where the company itself is obligated to buy back the shares of a deceased owner. To fund this, companies often buy life insurance policies on the owners.
The Connelly case involved exactly this setup. Two brothers owned a company. The company bought life insurance on both. When the first brother died, the company received $3.5 million in insurance money and used $3 million to buy the shares from his estate. The estate argued the company’s value shouldn’t include the insurance money, because it was immediately cancelled out by the obligation to pay the estate.
The Supreme Court sided with the IRS, ruling that the life insurance proceeds are a corporate asset that increases the company’s value before the buyout occurs. The redemption of shares doesn’t reduce the company’s per-share value; it just reduces the number of shares outstanding.
This creates a disastrous tax trap. The estate receives the agreed-upon price ($3 million in this case) but is forced to pay estate tax on a much higher value that includes its share of the insurance proceeds. This makes the traditional entity-purchase agreement a tax-inefficient and dangerous structure for any business owner with a potentially taxable estate.
Do’s and Don’ts for Buy-Sell Agreements After Connelly
| Do’s | Don’ts |
| ✅ Review your existing buy-sell agreement immediately. If it’s an entity-purchase agreement funded with corporate-owned life insurance, it is now a major tax liability. | ❌ Do not use an entity-purchase (redemption) agreement funded with corporate-owned life insurance if your estate may be subject to estate tax. The Connelly ruling makes this structure extremely tax-inefficient. |
| ✅ Consider a “Cross-Purchase” Agreement. In this structure, each owner personally buys a life insurance policy on the other owners. When an owner dies, the survivors receive the insurance money tax-free and use it to buy the shares from the estate. The money never touches the company’s books. | ❌ Don’t assume your buy-sell agreement’s price will be accepted by the IRS. The IRS is not bound by the price in your agreement for estate tax purposes, especially if it appears to be a way to transfer wealth for less than full value. |
| ✅ Use a Trust to Own the Insurance. An Irrevocable Life Insurance Trust (ILIT) or a special-purpose LLC can own the policies. This keeps the insurance proceeds out of the company’s value and out of the individual owners’ personal taxable estates, providing the most tax protection. | ❌ Don’t ignore the complexity of restructuring. Changing insurance ownership can have its own tax consequences (like the “transfer for value” rule) and requires careful planning with an experienced attorney. |
| ✅ Consult with your legal and tax advisors. The Connelly decision is a paradigm shift. You need professional guidance to navigate the changes and protect your estate. | ❌ Don’t just ignore the problem. Failing to update your agreement after Connelly could be a multi-million dollar mistake for your heirs. |
| ✅ Ensure any new agreement is a bona fide business arrangement. The agreement should be comparable to what arm’s-length parties would agree to and not just a device to transfer wealth to family for cheap. | ❌ Don’t make the agreement too complex for the number of owners. A cross-purchase agreement becomes very complicated with many owners, as it requires n(n-1) policies (e.g., 4 owners need 12 policies). A trust-owned structure is often better in these cases. |
Red Flags for the IRS: Top Valuation Mistakes to Avoid
The IRS sees thousands of valuation reports, and its auditors are trained to spot common errors. Making one of these mistakes is like sending up a flare inviting a challenge. Avoiding them is your first and best line of defense.
- Mistake 1: No Support for Your Numbers. This is the most common and deadly sin in valuation. A report that just states a conclusion without explaining the “why” is worthless. Every major assumption—especially the discount rate, growth rate, and weighting of different methods—must be thoroughly explained and justified with objective data.
- Mistake 2: Using a Valuation Made for a Different Purpose. You cannot use a valuation prepared for a bank loan or for setting employee stock option prices (a “409A valuation”) for an estate tax filing. Those valuations have different standards and levels of scrutiny. Using one for an estate tax return is an automatic red flag and may mean the three-year clock for an audit never even starts.
- Mistake 3: Inappropriate “Comparable” Companies. A frequent error in the Market Approach is using public companies or transaction data that aren’t truly comparable to the business being valued. You can’t value a local hardware store using multiples from The Home Depot without making huge, well-documented adjustments.
- Mistake 4: Relying on “Rules of Thumb.” Appraisers cannot value a business by simply applying a generic industry multiple, like “dental practices sell for 2 times revenue.” These rules of thumb ignore the unique facts and risks of the specific business and are immediately dismissed by the IRS and the courts.
- Mistake 5: Internal Inconsistencies. The valuation report must be internally consistent. For example, an appraiser can’t argue in the Market Approach section that no public companies are comparable, but then use data from those same public companies to calculate a discount rate in the Income Approach section. This kind of contradiction destroys the appraiser’s credibility.
- Mistake 6: Simple Math Errors. It sounds basic, but math errors are surprisingly common and can completely undermine a report. An error early in the calculation can have a cascading effect, throwing off all subsequent conclusions.
From Theory to Reality: The Valuation Process and How to Survive an Audit
A strong valuation is your shield in the estate tax process. Here’s how to build one and how to use it if the IRS comes knocking.
Step 1: Hire a True “Qualified Appraiser”
The IRS doesn’t just accept a valuation from anyone. It must be a “qualified appraisal” prepared by a “qualified appraiser.” This isn’t your local CPA or a business broker unless they hold specific, recognized valuation credentials.
Look for professionals with designations like:
- ASA (Accredited Senior Appraiser) from the American Society of Appraisers.
- ABV (Accredited in Business Valuation) from the American Institute of CPAs (AICPA).
A qualified appraiser must also be independent, with no financial interest in the business or the outcome of the valuation. Their job is to provide an objective opinion, not to act as an advocate for the taxpayer.
Step 2: The Appraisal Process Unpacked
A professional valuation is a formal, structured process that follows established standards.
- Engagement: You and the appraiser will sign an engagement letter that clearly defines the “who, what, when, where, and why” of the valuation. This includes the exact ownership interest being valued, the valuation date (date of death), and the standard of value (Fair Market Value).
- Information Gathering: The appraiser will request a mountain of documents. This typically includes at least 3-5 years of financial statements and tax returns, legal documents like articles of incorporation and buy-sell agreements, and customer lists.
- Management Interviews: This is not just a paper exercise. The appraiser will conduct in-depth interviews with the company’s management to understand its history, operations, competition, strengths, and weaknesses.
- Analysis and Conclusion: The appraiser will analyze all the data, apply the three valuation approaches, weigh the results, and arrive at a final conclusion of value.
- The Report: The final product is a comprehensive written report, often 70+ pages long. It must be detailed enough that another appraiser could read it and replicate the analysis. This report is the evidence you will submit to the IRS.
Step 3: Defending Your Valuation in an IRS Audit
Even a great appraisal can be selected for audit. If that happens, your preparation and strategy are everything.
- The Best Defense is a Good Offense: The single most effective strategy is to file a complete, detailed, qualified appraisal report with the original estate tax return. Submitting a number without backup is like inviting the IRS to invent their own, much higher number.
- Understand Their Argument: When the IRS challenges the value, your first move is to request a copy of their analysis. This tells you exactly what they are disputing—is it the discount rate, the comparable companies, or something else? This allows you to focus your defense.
- Document Everything: Keep a meticulous record of all communications with the IRS. This is your best defense against the “shotgun” audit strategy, where an agent makes one argument, and when you refute it, they come back with a completely different argument at the next meeting. Documenting this pattern of shifting arguments can be very persuasive if the case ever goes further.
- Educate, Don’t Argue: The appraiser’s role during an audit is to educate the IRS agent on the methodology and reasoning behind the report. A professional, cooperative approach aimed at helping the agent understand the analysis is far more effective than an adversarial one.
Professional Appraisal vs. DIY: A Cost-Benefit Analysis
| Feature | Professional Qualified Appraisal | DIY or Unqualified Valuation | |—|—| | Cost | Higher upfront cost ($7,000 – $10,000+). | Low or no upfront cost. | | IRS Defensibility | High. Designed to meet IRS standards and withstand scrutiny. Provides a strong basis for negotiation. | Very low. Often contains fatal flaws and is easily dismissed by the IRS, leaving you with no credible defense. | | Risk of Penalties | Low. A well-reasoned appraisal can help you avoid the 20-40% substantial understatement penalties. | High. An aggressive, unsupported value is a direct path to significant penalties and interest on top of higher taxes. | | Statute of Limitations | Starts the 3-year clock for an IRS audit. After 3 years, the IRS generally cannot challenge the value. | May fail the “adequate disclosure” rule, meaning the statute of limitations never starts. The IRS can audit the return indefinitely. | | Peace of Mind | High. Provides confidence that you have a defensible position and have minimized tax exposure legally. | Low. Creates lingering uncertainty and the risk of a costly and stressful IRS battle years down the road. |
Frequently Asked Questions (FAQs)
What is the difference between Fair Market Value and Fair Value? Yes, they are different. Fair Market Value is the standard for federal tax purposes. Fair Value is a legal term defined by state law, often used in shareholder disputes, and may not allow for valuation discounts.
Is a business valuation always required for estate tax? Yes, if a privately held business interest is part of an estate that exceeds the federal or state tax exemption, a formal valuation is required by the IRS to calculate the tax due.
Can my company’s CPA do the valuation for my estate? No, not unless they are also a “qualified appraiser” with credentials like ABV or ASA. The IRS requires an independent expert to ensure the valuation is objective and follows professional standards.
Does the IRS have to accept the value in my buy-sell agreement? No. The IRS is not bound by the price in a buy-sell agreement, especially if it seems like a way to pass the business to family for less than full value.
What is the “alternate valuation date”? Yes, an executor can choose to value estate assets six months after the date of death. This is only allowed if doing so lowers both the total value of the estate and the estate tax owed.
What happens if the IRS challenges my valuation? Yes, you can defend it. The process becomes a negotiation with the IRS. A strong, well-documented qualified appraisal filed with the return is your best evidence and defense during this process.
Will the federal estate tax exemption change in 2026? Yes. Under current law, the high exemption amount is scheduled to be cut roughly in half on January 1, 2026. This “sunset” will subject many more estates to the federal estate tax.