Gift & Estate Valuation: Key IRS Requirements You Should Know

When it comes to transferring wealth, whether through gifts during your lifetime or bequests after death, one of the most important aspects to consider is gift and estate valuation. The IRS has strict requirements for determining the fair market value of assets, and mistakes can lead to audits, penalties, or even disputes among heirs. Understanding these rules — especially those related to gift tax valuation — can help ensure compliance and peace of mind.

Why Accurate Valuation Matters

The IRS uses asset valuations to calculate both gift and estate taxes. When you give a gift that exceeds the annual exclusion limit (which is adjusted periodically), the value of that gift must be reported on a gift tax return (Form 709). Similarly, when someone passes away, the total value of their estate determines whether estate taxes apply.

An inaccurate valuation — either too high or too low — can have serious consequences. Undervaluing assets may trigger IRS scrutiny and potential penalties, while overvaluing them can lead to paying more tax than necessary. That’s why professional gift tax valuation services are so crucial.

Defining Fair Market Value

The IRS defines fair market value as “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 sell, and both having reasonable knowledge of relevant facts.”

This standard applies to all types of assets, including real estate, closely held business interests, artwork, jewelry, and other tangible or intangible property. For non-publicly traded assets, determining fair market value can be complex — requiring professional appraisals and supporting documentation.

IRS Requirements for Gift & Estate Valuations

Here are some key IRS requirements and best practices to keep in mind:

1. Qualified Appraisals:
   For significant gifts or estate assets, the IRS requires a qualified, independent appraisal. A “qualified appraiser” must meet specific education, experience, and certification standards.
2. Timely Reporting:
   Gift tax returns (Form 709) must generally be filed by April 15 of the year following the gift. Estate tax returns (Form 706) are due nine months after the date of death, with extensions available.
3. Documentation & Support:
   Every valuation should include detailed documentation supporting how the value was determined — including market comparisons, income approaches, or asset-based methods.
4. Discounts & Adjustments:
   For certain assets, such as shares in family-owned businesses, valuation discounts (for lack of marketability or control) may apply. However, these must be justified with solid evidence to withstand IRS scrutiny.

Common Mistakes to Avoid

One of the most frequent errors in gift tax valuation is using outdated or informal appraisals. Another is failing to update valuations when asset values change significantly. Relying on non-professional estimates can result in IRS challenges and costly disputes.

Conclusion

Accurate gift and estate valuation is not just about compliance — it’s about protecting your legacy. By following IRS requirements, obtaining professional appraisals, and maintaining proper documentation, you can ensure smoother wealth transfers and minimize tax exposure.

Whether you’re planning a lifetime gift or managing an estate, investing in a proper gift tax valuation is one of the smartest financial moves you can make.