How Maximizing Gifts Reduces Estate Tax: Discounted Valuations

Regardless of what your ultimate gifting strategy is—whether you’re gifting assets outright to individuals or gifting assets into irrevocable trusts for purposes of protecting them and furthering estate tax planning—how you do the gifting is so important.

You’re hearing a lot of conversations about estate tax right now because, in 18 months, estate tax laws are subject to change. Right now, in 2024, you can pass up to $13.61 million in assets free of any estate tax. That’s a lifetime transfer tax, so it’s not just upon your death; the IRS actually looks at gifts you made throughout your lifetime as well as transfers upon your passing. So, there’s a lot of conversation around gifting strategies, and this is probably the easiest way to get assets out of your individual name and into the hands of others. That’s what it really comes down to—getting assets out of your individual name, putting them in trust, and giving them to other individuals.

When you hear people talk about this, whether it’s practitioners, attorneys, or other planners, you’ll often hear them discuss the idea of giving assets to other people. That’s a great strategy, and the gifting aspect of that is crucial. However, there’s a piece missing from this gifting conversation that is not maximizing your ability to reduce your estate tax, and that is discounted valuations. This is still related to gifting, but we want to focus on this next level of advanced estate tax planning, which really centers on discounted valuations.

There’s a whole world of professionals—CPAs and others—who do valuations of business entities. They look at an entire spectrum of factors, such as the industry you’re in, how you’ve performed over the last few years, your books and financial statements, your key employees, your succession plan, and the owner’s ability to sell the business. One of the other things that comes into play is how the entity itself is legally structured.

One of the ways we reduce or maximize your ability to give more assets is by placing assets into a holding company, whether it’s a Family Limited Partnership (FLP) or a Family Limited Liability Company (FLLC). We structure that on paper in a way that allows a valuation expert to come in and provide significant discounts. The easiest way to do that is by structuring the business entity—the LLC or FLP—in a way where it is mostly non-voting units. For example, you might have one voting unit and 99 non-voting units. The significance of those non-voting units alone allows a valuation analyst to come in and provide a significant discount for lack of marketability and lack of control. I won’t go into detail about what that means here—maybe I should do a video with a valuation analyst about what that actually means; that’s a great idea. But the point is, you get significant discounts, ranging from the high 20% to possibly up to 40%.

So, what does that mean when I talk about discounts from the high 20% to 40%? Here’s an example: Let’s say you have an LLC, and you take a brokerage account worth $10 million and move it into that LLC. Now, you take that 99% non-voting interest and gift it to one of your children. We have to value that 99% interest—not the specific securities, but the interest that you gifted. Because it’s a non-voting interest, that valuation expert can give a 20% to 40% discount. So, you move $10 million into that entity, and after the discount—let’s say it’s a 30% discount—the securities, worth a fair market value of $10 million, are now in an entity valued at $7 million. Instead of giving $10 million in securities to one of your children for purposes of reducing your estate tax, you’re giving them a $7 million interest in an entity that you can continue to control. Instead of using up $10 million of your $13.61 million exemption, you’ve only used $7 million of it. Now, you have an additional $3 million, leaving you with $6 million in exemption left over. This is how you really maximize your ability to gift.

Regardless of what your ultimate gifting strategy is—whether you’re gifting assets outright to individuals or into irrevocable trusts for protection and estate tax planning—how you do the gifting is crucial. So, remember that discounted valuations are a person’s best friend. Don’t make any gifts without having a conversation about how to get these discounted valuations on your assets. It’s so important and should be part of anyone’s gifting and estate tax strategy over the next 18 months.