Valuation discount - How Millionaires Live

A valuation discount is a reduction in the appraised value of a private business or partnership interest, applied because the interest carries no control and no ready market, which lowers the value on which US gift and estate tax is calculated.

In plain terms

Ten percent of a company worth $10 million is not worth $1 million to anyone who has to actually own it. The holder cannot replace management, force a sale or a dividend, or sell the stake to a stranger without finding one first. Appraisers price that handicap in two parts — a discount for lack of control and a discount for lack of marketability — and the gift or the estate is taxed on what is left. It is the mechanism that makes a family limited partnership worth building.

How it works

The governing standard is fair market value: what a hypothetical willing buyer would pay a willing seller, neither under compulsion. The IRS’s foundational guidance for closely held stock, Revenue Ruling 59-60, is explicit that no formula applies and that valuation is a question of fact — which is why discounts are argued case by case and end up in Tax Court rather than looked up in a table.

Two discounts do most of the work. Lack of control (a minority discount) reflects an inability to direct the entity. Lack of marketability reflects the absence of a buyer, and appraisers support it with studies of restricted stock and of pre-IPO transactions. Critically, they are applied in sequence, not summed: a 20% control discount followed by a 25% marketability discount produces a 40% total reduction, not 45%.

Family relationships do not defeat the discount. Revenue Ruling 93-12 rejected the family-attribution theory, so a parent giving five children 20% each may claim a minority discount on every block even though the family together owns the whole company. What does defeat it is Section 2704, which disregards restrictions written into the entity documents purely to depress value — and, in estates, the courts. In Connelly v. United States (2024) a unanimous Supreme Court held that a corporation’s obligation to redeem a dead shareholder’s stock is not a liability offsetting the life insurance proceeds funding it, raising the taxable value of the shares rather than lowering it.

The numbers

Lack of control: commonly 10%–25%, depending on what the interest can actually block.
Lack of marketability: commonly 15%–35%, higher where transfer restrictions bite and distributions are irregular.
Combined, in practice: 20%–40% is the usual claimed range; courts have landed in the mid-30s on family partnership interests.
The compounding rule: 20% then 25% equals 40% total, not 45%.
Statute of limitations: three years from the filing of an adequately disclosed gift on Form 709 — and unlimited if the gift is not adequately disclosed, which requires a qualified appraisal or a full description of the method used.
Penalties, 2026: 20% of the underpayment where reported value is 65% or less of the correct value; 40% where it is 40% or less.
What the discount is stretching: the $15,000,000 per-person exemption in effect for 2026.

What people get wrong

That a discount is a number you select rather than a position you have to defend. There is no schedule; the percentage is a fact found by a court, and the same interest can be worth meaningfully different amounts depending on which appraiser wrote which report. Two consequences get missed. First, the discount is only durable if the gift is adequately disclosed — one reported without a qualified appraisal never starts the three-year clock, so the IRS can revalue it decades later, when the asset is worth far more and the person who could explain the structure is dead. Second, discounts are not free money: the interest passes with the giver’s original cost basis rather than the step-up available at death, so estate tax saved at 40% is partly repaid as capital gains tax at up to 23.8% on a base the discount itself made larger.

In plain terms

How it works

The numbers

What people get wrong

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