I assisted with the preparation of my first business valuation in the early 1990’s. The experience was different than the audits and taxes I had worked on during the first few years in public accounting. I liked it. I needed to think creatively. I had to apply accounting knowledge as well as financial and economic theory. It wasn’t a tick and turn checklist driven exercise. I grew to realize that business valuation was a craft…part art and part science. Every valuation engagement is unique; I was hooked. I worked to make business valuation a larger part of my practice. Eventually, I made business valuation my primary focus.
During the past 25 years I have seen valuation theory change, grow, and become more refined. I have developed relationships with other valuation professionals, estate planning attorneys, and financial advisors for high-net-worth individuals. I contact them frequently to discuss what is happening with their practice, discuss technical / business valuation theory, and talk about what developments they are seeing in the industry. There was a common thread that came up in every conversation this year. Everyone is BUSY! Not just busy with a full slate of work, but the kind of busy where you need to be even more proactive with your clients and actively communicate timing expectations. We all are busier than we have been in recent memory. Most of the increase in activity we are seeing is centered on estate planning.
What is the driving force behind the surge in estate planning activity?
I think it is a combination of two things. The first contributor is the aging of business owners. Business owners are getting older and more are looking to transfer ownership interests. The second and probably larger factor is the Biden administration. In May of 2021 the U.S Treasury released a Publication that detailed many proposed tax code changes that the Biden administration would like to enact for Fiscal year end 2022. Some of the provisions included in the Publication include raising the top income tax rates; taxing capital gains as ordinary income; and treating transfers of appreciated property as a sale which would trigger capital gains taxes on the property. One item that was not listed in the publication was a reduction in the estate and gift tax exemption. This could have a tremendous impact on the estate planning goals of high-net-worth individuals. Many prognosticators in the industry believed that this would be included in the Biden administrations tax code changes. It may still be included in the final changes. No one knows at this point. We do know that there are sunset provisions in the estate tax laws passed under the Trump administration that will revert back to prior law in 2026. This means that even if no additional reduction is passed by the Biden administration, the estate and gift exemption will be drastically reduced from the $11.7 million per taxpayer level we have today. Many people believe that changes in the tax code could become effective for the year ended December 31, 2021.
I believe these factors are the cause for the surge in valuation work. Proactive business owners are taking advantage of the higher exemption amounts and lower tax rates. They want to avoid the increase in taxes contemplated in the Publication. I don’t see the workload for valuation professionals slowing down any time in the near future.
The good news is that there is still time this year for business owners to take advantage of estate planning opportunities before the tax code changes. As a business valuation professional, I am busy, and that is great. I love the work and helping my clients with their business valuation needs. I can still help more and I know my colleagues feel the same way.
Visit our webpage for more information on McKonly & Asbury’s Business Valuation Services. Should you have questions about the potential tax code changes and implications to your estate plan, or business valuation questions in general, don’t hesitate to contact me, T. Eric Blocher CPA, ASA, CVA at firstname.lastname@example.org.