How is a closely held business valued for estate planning?
By Greg Garone, CEPA® · Published by Morrowgate Private Wealth · Last reviewed October 2026 · 6 minute read
For estate and gift tax, the standard is fair market value: what a willing buyer would pay a willing seller, with neither forced to act and both knowing the relevant facts. A qualified appraiser usually weighs three approaches (income, market and assets) and may apply discounts when the interest is a minority stake or hard to sell. The number matters well beyond taxes: your buy-sell price, your insurance and how fairly your children are treated all depend on it.
The three approaches
Income
What the company’s future cash flow is worth today. Usually the main approach for a profitable operating business.
Market
What similar companies sold for, often as a multiple of earnings.
Asset
What the assets are worth minus debts. Common for holding companies and real estate entities.
The IRS’s long-standing guidance for valuing closely held stock, Revenue Ruling 59-60, lists the factors an appraiser should consider, from the company’s history and outlook to its earnings, dividend capacity and comparable sales.
Discounts, and why they matter
A 30% stake in a private company is usually worth less than 30% of the whole, because the owner can’t control decisions and can’t easily sell. Appraisers reflect that with discounts for lack of control and lack of marketability. They can lower the taxable value of gifts and estates, but they have to be supported by a qualified appraisal, and the IRS may challenge them.
Your buy-sell price is not automatically the value
Owners often assume the price in their buy-sell agreement sets the value for estate tax. Under Section 2703 of the tax code, the IRS can disregard that price unless the agreement meets specific tests, including that its terms are comparable to an arm’s-length deal. And after Connelly, company-owned life insurance can raise the value even when the agreement says otherwise.
When to get a valuation
- Before gifting shares, so the gift tax return can adequately disclose the value.
- When you update a buy-sell agreement or the insurance behind it.
- After a big change: a new owner, a major contract, an offer, or a hard year.
- Every two to three years otherwise, so every document stays on a current number.
Broker’s estimate or certified appraisal?
A broker’s opinion is useful for planning a sale. For estate, gift and buy-sell purposes, attorneys usually want a written appraisal from a credentialed appraiser, such as an ASA, ABV or CVA, that can stand up if the IRS asks questions.
Questions for your attorney and CPA
- When was the business last professionally valued, and for what purpose?
- Do our buy-sell price, insurance and estate plan all use the same number?
- Would discounts apply to my interest, and would they hold up?
Educational only, not tax, legal or appraisal advice. Valuation rules and IRS positions change; confirm with your advisors.