Valuation: Discounts for Estate Planning

By Jeff Faust, CVA, Director of Valuation Services and Megan Bigham, Valuation Analyst 
ASL Business Valuation Services 

Upcoming tax regulation changes may have sweeping effects on how family-owned entities are valued. 

Initially, the IRS did not allow discounts for lack of control in valuing family-owned interests. In 1993, the IRS ruled that these interests were not collective and, therefore, lifted the limitation for this discount. However, there are still some situations where discounts for lack of marketability and lack of control are challenged on the basis of IRS Code §2704.

Under this code section, discounts based on liquidation restrictions will not be considered if these restrictions can lapse or be removed by the family. In addition, discounts for restrictions that would normally reduce value in other situations, but do not in family-to-family transfers, are not allowed. Amendments to this code that will further limit the use of discounts may be looming. Cathy Hughes, from the Treasury’s Office of Tax Policy, indicated that she expects the amendments to be released by mid-September of this year.

As such, anyone who may be thinking about estate planning should get started as soon as possible in order to take advantage of the currently available discounts.