For high-net-worth individuals and their advisors, estate planning is a game of strategy, and valuation is the cornerstone of the playbook. While the terms "gift tax valuation" and "estate tax valuation" are often used in the same breath, they refer to two distinct processes with key differences that can have a significant impact on your tax liability. Understanding these nuances is crucial for practitioners and investors in 2025 to ensure compliance and optimize wealth transfer strategies.

Here’s a breakdown of the key differences:

1. The "When" of Valuation: Date of Transfer

This is the most fundamental difference.

• Gift Tax Valuation: The valuation date for a gift is the date the gift is completed. This is the day the asset is transferred from the donor to the recipient. For publicly traded stocks, it’s the average of the high and low selling prices on that specific date. For illiquid assets like private business interests or real estate, a formal appraisal must establish the fair market value as of that exact date. This requires precision, as the value can fluctuate.
• Estate Tax Valuation: The valuation date is typically the date of the decedent's death. This is also known as the "date of death value." However, the executor of the estate has a unique option: they can elect to use an "alternate valuation date," which is six months after the decedent's death. This option is only available if it results in a lower gross estate value and a lower estate tax liability. This flexibility can be a powerful tool for estates with assets that decline in value shortly after death.

1. The "Who" is Involved: Willing Buyer and Seller

While both valuations aim to determine "Fair Market Value" (FMV), the context of the transaction differs. FMV is defined by the IRS as the price at which a property would change hands between a willing buyer and a willing seller, neither being under compulsion to buy or sell, and both having reasonable knowledge of relevant facts.

• Gift Tax Valuation: The valuation is based on a hypothetical transaction between a hypothetical willing buyer and a willing seller. The key is that the gift is made during the donor's lifetime.
• Estate Tax Valuation: The valuation is based on the fair market value of the assets as they are transferred at the time of death. The "willing seller" is the decedent's estate.

1. Lifetime Exemption vs. Estate Exemption:

In the U.S., the gift tax and estate tax are linked through a unified credit system and a lifetime exclusion amount.

• Gift Tax: For 2025, the annual gift tax exclusion is $19,000 per recipient. You can give up to this amount to as many people as you want each year without filing a gift tax return or using your lifetime exemption. Gifts above this amount begin to use up your lifetime gift tax exemption, which for 2025 is $13.99 million. Once you exceed your lifetime exemption, gift tax is owed.
• Estate Tax: The estate tax is levied on the total value of a deceased person's assets that are transferred to heirs. The estate tax exemption for 2025 is also $13.99 million. Any taxable gifts made during your lifetime reduce this exemption. For example, if you used $2 million of your lifetime gift tax exemption while living, your estate would only have $11.99 million remaining for estate tax purposes.

1. The Role of Discounts (and Their Scrutiny):

Both gift and estate valuations can benefit from legitimate discounts, but they are often applied in different contexts and can be subject to different levels of IRS scrutiny.

• Discounts for Lack of Marketability (DLOM) and Lack of Control (DLOC): These are commonly applied to illiquid assets like minority interests in a closely held business. The IRS will closely scrutinize these discounts, especially for gift tax purposes where a valuation is adequately disclosed to start the statute of limitations. A well-documented, defensible valuation report from a qualified appraiser is paramount.
• Planning vs. Post-Mortem Valuation: Gift tax valuation is a proactive planning tool, allowing you to use discounts to transfer wealth efficiently over time. Estate tax valuation is often a reactive, post-mortem process, where the value is locked in at death or the alternate valuation date.

In conclusion, while the core principle of determining fair market value is the same, the context, timing, and strategic implications of gift tax and estate tax valuations are fundamentally different. For anyone involved in wealth transfer in 2025, a deep understanding of these distinctions and the guidance of experienced valuation experts and tax professionals are essential to navigate the complex tax landscape successfully.