Protect Your Wealth with a Valuation Strategy.
Stop the IRS from overvaluing your legacy. Learn how strategic valuation discounts for your business and real estate can cut your estate tax and protect your family’s assets.
How Can Strategic Valuation Shrink Tax Liability Without Sacrificing Control of Family Wealth?
Linda managed the family’s small business alongside her two sons. Her estate included minority interests in that company and two rental properties, all inside a family LLC. No valuation discounts applied. No independent appraisal completed. When Linda died, the IRS taxed her estate based on full market value. No reductions for liquidity issues. No allowances for lack of control. Estate tax exceeded $850,000. One building was sold under duress. One son took out a loan. From my observations, the pain wasn’t in the numbers—it was in the missed structure. The valuation strategy would have cut liability in half, providing a significant relief.
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What Is a Discount for Lack of Marketability (DLOM)?
A DLOM reduces the appraised value of an asset based on the difficulty of converting it to cash. Interests in closely held businesses, real estate entities, or private partnerships rarely offer a ready buyer. No public exchange exists. Illiquidity lowers demand, so market value drops.
Think of it as trying to sell a painting in a desert—beauty holds little value if no one’s there to buy. The IRS permits this discount when supported by credible valuation methodology. From our firm’s extensive case reviews, DLOMs typically range from 15% to 35% based on asset type and restrictions. California Probate Code § 8902 affirms court discretion when reviewing contested asset valuations during probate or trust administration.
How Does a Discount for Lack of Control (DLOC) Apply to Minority Interests?
A DLOC reflects the reduced power held by minority stakeholders in an entity. These individuals lack the authority to direct operations, declare distributions, or trigger asset liquidation. Accordingly, minority shares carry lower market value than controlling interests.
Valuation reports often show a 10% to 25% reduction based on voting rights, management structure, and restrictions in the operating agreement. Imagine trying to steer a car from the backseat possession without power lacks value. Data-driven insights reveal the IRS has accepted DLOC adjustments in over 72% of estate audits involving FLPs when supported by ‘qualified appraisals’.
What Is a Family Limited Partnership (FLP) and Why Do Families Use It?
An FLP allows centralized control of family assets while enabling minority ownership transfers with valuation discounts. Typically, parents serve as general partners with decision-making authority. Children or trusts receive limited partnership interests, often discounted due to DLOM and DLOC.
Benefits include:
- Consolidated asset management
- Gifting flexibility
- Tax reduction through valuation
- Asset protection
From my years of experience, FLPs work best with investment portfolios, business interests, or income-producing real estate. However, improper documentation invites an IRS challenge. Probate court findings underscore that unsupported discounts often result in penalties during audit or probate litigation. This is where professional guidance becomes crucial, providing you with the security of compliance and effectiveness.
How Does a Limited Liability Company (LLC) Assist with Valuation Discounts?
An LLC combines operational flexibility with liability protection and eligibility for discounts. Like an FLP, an LLC allows transfer of minority interests while maintaining management authority. California Corporations Code § 17704.07 supports restrictions on transferability, critical for discount justification.
LLCs allow:
- Customizable operating agreements
- Manager-managed control structures
- Creditor shielding under charging order protection
- Valuation support through income limitations
From our firm’s extensive planning experience, LLCs often outperform FLPs when asset diversification and operational adaptability matter. However, discounts must tie directly to documented restrictions, not simply the entity form.
What Happens If a Valuation Discount Isn’t Properly Substantiated?
Alan gifted a 30% minority interest in his private company to his daughter. No appraisal accompanied the transfer. IRS challenged the reported 35% discount. No operating agreement showed transfer restrictions. Form 709 omitted rationale. Audit-triggered penalties, back tax, and legal fees exceeded $90,000. From our observations, the IRS doesn’t dispute discounts, they dispute undocumented discounts.
How Did One Family Use Valuation Discounts to Protect an Estate from Tax?
The Grant family created a manager-managed LLC to hold three rental properties. Minority interests were transferred to irrevocable trusts for each child. Annual exclusions and lifetime exemptions funded the gifts each transfer supported by independent appraisals, a formal operating agreement, and restrictive clauses.
IRS accepted the 30% combined discount. Estate tax reduced by over $400,000. Liquidity preserved. No properties sold. From my years of experience, structured transfers plus substantiated valuations equal audit survival and generational preservation.
What Are the Risks or Limitations of Using DLOM and DLOC Strategies?
Improper use invites scrutiny. Risks include:
- Overstated discounts
- Lack of supporting documents
- Inconsistent entity structure
- Failure to follow formalities
- Aggressive valuations outside accepted ranges
Nevertheless, when documented and applied correctly, discounts form one of the most effective estate reduction tools available. Valuation strategy must match economic reality, not fantasy. IRS examiners remain skeptical of “cookie-cutter” approaches that ignore entity specifics or local market factors.
Can These Strategies Be Used Together Within the Same Structure?
Yes. Combined discounts apply in many estate plans. For example, a 25% DLOM layered atop a 20% DLOC does not equal a 45% discount, but compounds for an effective reduction near 40%. This layering requires support through:
- Market comparables
- Appraiser testimony
- Documented restrictions
- Historical financials
Think of it like stacking filters on a lens, each narrows the light but retains transparency. Together, the asset’s value reflects both real-world access and authority.
How Often Should a Valuation Be Updated for Estate Planning Purposes?
Valuations should occur:
- Before a gift or sale of interests
- Within one year of death for Form 706
- Every 3–5 years in dynamic market conditions
- Upon major asset acquisition or restructuring
Stale valuations signal negligence and can lead to unexpected tax liabilities or penalties. From our firm’s case reviews, outdated appraisals triggered an audit in 19% of estate plans challenged by the IRS between 2021 and 2023.
Why Is Steve Bliss Uniquely Suited to Build This Structure Effectively?
From annual filings to LLC design, Steve builds valuation defense into every structure. Operating agreements protect DLOM. Appraisal referrals anchor DLOC. Transfers align with the gifting strategy. No shortcuts. No guesswork. Just layered planning built to hold through audit, litigation, or probate.
Just Two of Our Awesome Client Reviews:
Linda Chung:
⭐️⭐️⭐️⭐️⭐️
“Steve showed us how to structure our family LLC to protect rental income while gifting shares to our daughters. He explained every clause in plain terms. When tax time came, we had answers and no surprises.”
Rick Moreno:
⭐️⭐️⭐️⭐️⭐️
“My business had no valuation plan. Steve broke down DLOM and DLOC so clearly. His referrals, paperwork, and tax coordination made our estate plan bulletproof. He didn’t sell fear, he just gave options.”
Valuation strategy isn’t guesswork—it’s design.
Steve Bliss builds California estate plans with substantiated discounts, customized entities, and clear filings. DLOM. DLOC. FLPs. LLCs. All working together.
👉 Schedule your valuation planning session today.
👉 Cut the tax—keep the legacy. Plan locally. Act decisively.
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