valuation discounts(estate planning)

CFA Level III
#1

with regard to estate planning strategies (On Page 269, Book 1 of Schweser), what the purpose of “valuation discounts” ? Valuation discounts reduces estate tax?? thanks in advance.

#2

manet_5 Wrote: ------------------------------------------------------- > with regard to estate planning strategies (On Page > 269, Book 1 of Schweser), > > what the purpose of “valuation discounts” ? > > Valuation discounts reduces estate tax?? Yes. > > thanks in advance.

#3

Yes, discounts for lack of liquidity &/or marketability are valid ways to reduce the value of the transferred estate…and thus reduce the estate tax bill.

#4

Its a nice way to vend assets in and reduce estate tax. Example - grantor establishes a partnership that acquires a ~$3m interest in a FOF hedge fund. Due to the ltd liquidity, one may then gift the partnership to the trust at a valuation discount.

#5

valuation discount works like this, if the investor holds illiquid or private asset, you gonna have to apply financial models to assess the value of the asset. on top of that, there are minority and illiquidity discounts. Whenever you apply financial models, ie, not transaction based, you have room to play around with the value, the implication is you can value the asset lower than what it actually is. hence you don’t pay as much estate tax

#6

many thanks!!!

#7

what the purpose of “valuation discounts” ? Valuation discounts reduces estate tax?? thanks in advance.

basically used as estate planning stragy, how? there ise a privately held company, and testator transfer it to receipient…Because it’s privately held there is a liquidity discount and b/c receiver may not have total control there may be nimority discount…the higher the discount rate the lower the company value and the lower the tax…Because governmnt don’t want tax revenue to decline, court approval is needed on disount rates.

#8

Lol I love reading everyone’s interpretation of the discounts for lack of marketability and control section of the CFAI material. I perform “discount studies” for a living. What really happens is as follows:

  1. Dad owns real estate

  2. Dad puts real estate into an LLC. The real estate is the only asset in the LLC.

  3. Dad gets a real estate appraisal of the real estate.

  4. Dad “gifts” a less than 50% interest in the LLC (not a gift of property - a gift in the LLC) to son.

  5. I perform a “discount study” and write a report to justify that a less than 50% interest in an LLC is not worth as much as 50% of the value of the property because the son does not have the right to sell the property (lack of control) and if he tries to sell the 50% interest in the LLC it will be harder than selling the property (lack of marketability).

As a result of the above, if dad’s property is worth $15M and he wants to gift 40% of the LLC to his son, the pro rata share of the LLC (i.e., $6M) will be reduced by the appropriate discounts I determined in my report. For example, a 35% combined discount would result in the $6M pro rata value being reduced to $3.9M. Now, instead of paying gift taxes on a $6M gift, the taxes are now on a lower base of $3.9M. Oh and by the way, we basically make up the fucking discounts based on a bunch of really circumstantial evidence. The IRS fucking hates us. There’s a reason CFAI is super vague in the reading - this is a very “artsy” area.