Valuation discounts for non-business assets, such as cash, securities, and real estate held by an entity such as a limited liability company or a partnership have been common place in the estate and gift tax arena for years. Valuation discounts are used to represent the fact that assets subject to certain restrictions in which the purchaser would not have control over the decisions about the assets are not worth the same as assets that have no restrictions.

These discounts include minority interest discounts on the transfer of an interest in an entity where the transferee and members of the transferee's family have control of the entity. Currently, taxpayers have the ability to take significant discounts for lack of marketability and lack of control in connection with the transfer of non-business assets and interests in non-actively traded entities among family members. Generally, these discounts range from 25% to 45%.

Various members of Congress and the White House would like to eliminate the valuation discounts. By eliminating valuation discounts there could be a potentially significant increase in the estate taxes of many larger estates, as well as bring many estates within the taxable range.

While none of the proposals providing for the elimination or limitation of valuation discounts were included in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, it is important to remember that this is merely a two year tax patch. The White House and various Congressional leaders are keen on eliminating or limiting valuation discounts. This means that it seems likely that any final estate tax reform bill passed by Congress may include provisions eliminating or limiting valuation discounts. The good news is that any such bill eliminating or limiting valuation discounts would probable be effective as of the enactment date. This essentially grants a grace period for transactions completed before the enactment date of any bill that is finally passed with those provisions, thus allowing the taxpayer to enjoy the benefits of the discount.

(Updated June 2011)