Valuation Discounts: What’s the big deal?

Now that the proposal to eliminate valuation discounts for gift and estate tax valuations were removed from the Build Back Better Act, at least for now, you may be wondering what all the fuss was about.

Transferring valuable assets to the next generation while minimizing tax ramifications is one of the goals of most estate planning. For farmers the most valuable asset included in the estate planning process is typically farmland. How can this valuable asset be kept in the family without the fear of heirs having to sell some of the land to pay estate tax in the future? This is where valuation discounts can help.

Whether the farmland is owned outright or is in a partnership or LLC, if a non-controlling interest (50% or less) is being transferred or included in an estate, valuations discounts may be applicable. Under current laws and IRS regulations, the value of the entity is eligible for a discount for a lack of control (DLOC), and a discount for lack of marketability (DLOM). Depending on a number of factors, the effective combined discounts can be as high as 25% to 35%. In the illustration below, the combined discount is 32%:

As you can see, being able to use these discounts to transfer ownership is a big deal and can result in significant estate tax savings. While there have been multiple efforts to eliminate these discounts by Congress over the years, for now they are safe.