Intentionally Discounting The Value Of Your Business Or Estate

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Deliberately lowering the value of your business might sound counterproductive. However, for the purposes of estate planning, business planning, or both, lowering the value of your business may be a great option for business owners.  

Here at Consolidated Planning, we work to provide the necessary framework to uncover opportunities in your business, maximize results, and put you on a solid path to achieving all that is important to you.  

In this article, we’ll help you understand when and why you would intentionally lower your business value, two ways that affect you and the person you’re transferring shares to, all to help you decide if using discounts is right for your business goals.  


Why Should You Intentionally Lower Your Business Value?  

The stock of your business or commercial real estate are two of the primary things that can be transferred for the benefit of discounts in estate planning. A discount is typically used when choosing to transfer an ownership percentage directly to your children, grandchildren, or a trust to specifically benefit your children or grandchildren.    

Discounts are used to intentionally lower the value of your business. Yes, lower. By fragmenting the ownership of your business or estate, the value of each transferred interest is reduced. 

This will be one of the very few times where you want to intentionally reduce the value of your largest asset.  


A Lower Business Value Reduces The Size Of Your Taxable Estate  

If you believe your business interest or real estate will grow over time, coupled with having a taxable estate, it’s good to consider transferring a portion of these interests. Now, rarely do business owners transfer ALL of their interest to a child or trust, but transferring some makes good sense. For owner’s with a vast net worth for years after 2025, transferring some of the interests will reduce estate taxes.    

Business interests and real estate generally don’t have much liquidity, they appreciate more than inflation, and because of their value are a culprit to triggering an estate tax. Therefore, you can remove some of these amounts before they compound too much in your estate. 

While there are limits to how much you can transfer without paying a gift tax, the amounts are over 16M for most, after 2025.  More details on how this works can be found here.  

The strategy is to transfer your businesses or real estate interests, all while not losing control of either AND reducing your potential taxes over time. Since exemptions for gifts are limited, it’s smart to lower the value of these items using discounts.  

So, how can you get these said discounts?  

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A Lack Of Marketability Lowers The Value Of Your Business  

If you own an interest in a business, real estate, or both, a lack of marketability is one way to establish a lower business value. Lack of marketability means that if you transfer shares of your business or estate to someone else or to a trust for someone’s benefit, they can’t market it to the general public themselves.   

If they are to ever transfer to sell the interest, it must first be sold back to you, the business owner. 

Because the interest that you’re transferring has no ready market for its sale, the value of the interest transferred is often reduced by a discount due to the lack of marketability.  The share you keep in your estate will still be fully marketable to others, so no discount applies to the shares you keep. 


A Lack Of Control Lowers The Value Of Your Business  

A lack of control is exactly how it sounds. Not only does transferring shares to someone else (or a trust) limit them from selling to a third party without your permission, but this person doesn’t control anything. That’s because they have the minority of the shares outstanding, the shares themselves have no voting rights, or both. 

A non-controlling interest in your business is considered to be less valuable than a controlling interest.  

So even though this person may own a good portion of the business, they likely own the shares that lack any decision-making rights.  

Therefore the cost of their shares is discounted because they don’t have control of the company and cannot easily resell their interest to anyone else but back to you.  


Applying These Discounts To Benefit Your Business Or Estate 

Let’s assume you have a $10M business, and that you’d like to transfer $4M of it. While many factors apply to realizing what the discounts will actually be, using 15% as a discount for marketability and another 15% as a discount as a rule of thumb is common.    

If you wanted to transfer the $4M interest in the business without discounts, then the value of the gift would be $4M, and needlessly use some of that 16M estate exemption (years after 2025). Applying the rule of thumb discounts above would total 30%, or $1.2M of the $4M to be transferred. This means that your transfer for tax purposes would only be $2.8M, using a lot less of the exemption.*

Remember, you’re creating these discounts by creating the powers that you really want anyway – a lack of control and marketability for any shares you transfer. While these powers don’t apply to the shares you own and retain, they do apply to the shares transferred.  


Transfers to Trust  

We find that most business owners make these transfers to a trust for their family, and not directly to the family members. The main reason is straightforward – a trust often protects these special assets from the hands of creditors, bankruptcy, and divorce for each family member.  While taxes can take a piece of your hard-earned business, these other threats can too. 


Are Discounts Right For Your Business Or Estate Planning Needs?  

As a business owner, we know you don’t want to give away some of your business but with techniques like lack of marketability and lack of control, you can retain the majority of your shares that have control and marketability.  

So while the transferred shares are discounted, your shares are not. Your shares are still worth market value.  

This allows you to lower your estate in a discernible way without losing majority interest in your largest asset. Your asset will still be the same asset, just with a lower value, anywhere between a 20% to 40% discount.  

To learn more about lowering your taxes and maximizing your business value, talk with an experienced planning professional at Consolidated Planning.  

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2024-171430 Exp. 3/2026

Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. The information provided is based on our general understanding of the subject matter discussed and is for informational purposes only.  

This material contains the current opinions of Andy Brincefield and Consolidated Planning only. These are not the opinions of Park Avenue Securities, Guardian, or its subsidiaries.

*All scenarios mentioned herein are purely fictional and have been created solely for educational purposes. Any resemblance to existing situations, persons or fictional characters is coincidental. The information presented should not be used as the basis for any specific investment advice.

Published:  March 26, 2024