Page 35 - Business Valuation for Estates & Gift Taxes

Chapter 6

Control Versus Lack of Control

Introduction

The primary goal of estate planning is to maximize the wealth transferred to beneficiaries and minimize
the taxes paid to government. Two widely used methods that achieve this goal include the use of dis-
counts for lack of marketability and lack of control. Both of these discounts, in combination with other
estate planning strategies, can have significant impact on the value of a transferred interest. The courts
have recognized the use of discounts for lack of control as an accepted technique to minimize estate and
gift tax liabilities; however, the courts (and the IRS) recognize the high level of judgment required and
as a result, they heavily scrutinize such discounts. This chapter includes a discussion of the factors that
should be considered when valuing ownership interests using common valuation approaches and meth-
ods.

Levels of Value

Valuation adjustments for discounts and premiums must be considered in the context of ownership con-
trol and marketability of the ownership interests. Ownership characteristics and the value they reflect are
often illustrated using a "levels of value" chart.

Following are three traditional levels of value:

1. Control value

2. Minority marketable value ("as if freely traded")

3. Minority non-marketable value

Exhibit 1

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