The Doom of Discounts

The fate of valuation discounts has been most recently challenged in a bill introduced in Congress by Representative Earl Pomeroy of N. Dakota. On January 9, 2009, Mr. Pomeroy introduced a bill HR 436 which could pave the way for the demise of valuation discounts applicable to transfers of interests in estate planning entities such as the Family Limited Partnership, if it carries non-business assets. As defined in the bill, non-business asset means any asset which is not used in the active conduct of 1 or more trades or businesses. Example of a non-business asset would be marketable securities, which are generally wrapped up in a family limited partnership. The wrapper of family limited partnership helps estate planners to reduce the taxable value of transfered interest by application of valuation discounts.

The focus of this bill is to eliminate the use of customary valuation discounts, such as the discount for lack of control and lack of marketability, in determining the value of the transferred interest. According to the bill:

"the value of any non-business assets held by the entity shall be determined as if the transferor had transferred such assets directly to the transferee (and no valuation discount shall be allowed with respect to such non-business assets)."

Additionally, the bill emphasizes that in the case of the transfer of any interest in an entity not actively traded, no discount for lack of control will be allowed if the entity is controlled by family members.

It remains to be seen if the bill will be enacted by Congress. Please contact us with any questions or if you are in need of valuation services.