Wealth planning - Valuation Discount

I know this might be really simple to you guys esp. people living in US. But can someone explain to me why one of the criteria is “valuation discount”? Or to be more precise, how can a GRAT receive valuation discount? It took me ages to figure out why it’s benefitcial to use defective trust as well… I didn’t know the point of “being able to pay income and capital gain tax” instead of "wealth transfer tax… coz there is no such thing as wealth transfer tax in Australia.

You don’t have to be concerned how it can recieve a valuation discount rather than the fact a GRAT can, which then as you know is important for wealth transfering purposes.

Thanks striker but I would like to know how it works in simple words… It would be helpful if I can at least get a grasp on what kind of valuation discount it recevies. It helps me with framing of the picture in such a legislative session…

google GRAT valuation discount - there is no simple way to explain it. Which isn’t surprising as you want to dive into american tax codes and taxation is never straight forward.

I know how this works with limited partnerships, GRAT’s may be similar. The discount is a combination of lack of control and marketability discount. You place marketable securities you own and control into a a limited partnership. Now rather than owning the marketable securities you own a limited partnership interest in the LP. Then you put together a limited partnership agreement that gives mangement control of the LP to the general partner. The partnership agreement also restricts your ability to sell the LP interest and restricts distributions. You have taken securities that were marketable and controlled and took away those bennefits. The lack of control discount is usually based on comparable closed end funds. Closed end funds generally trade at a discount to net asset value. Some argue this is an implied lack of control discount. Marketability discounts are more subjective and usually involve looking at the partnrship agreement and seeing how much it restricts maketability (ability to sell your interest).

Thank you manny, that is really helpful. Although I can not be sure whether it is really the case but it surely loose few knots. Much appreicated.

Are we suppose to know in depth how the 7 wealth planning alternatives work or is it just sufficient to know the main pupose and attributes of each? I’m finding the details of each one of these really really confusing and hard to remember!

you just need to understand the following and how they woudl apply to a personal situation: Time Access Ccontrol Valuation discounts Taxation

I read that recently, and hopefully we won’t be tested on some of the design of the structures listed in that reading.

I think striker is spot on. That’s all you need, like a big table of 5 x 7 that summarise all the points, when exam come, just know where to find out what you want. My question arise because I have no idea what they’re talking about valuation discount, I don’t understand the concept as to what kind of valuation are they getting? I think Manny’s answer should be close if not spot on. Thanks again.