Introduction

Valuation discounts can be applied to any entity on the platform by updating the entity valuations.

Applying valuation discounts

1. Navigate to any entity and click Edit holdings then Update holdings

2. Toggle on Apply discount for tax calculation purposes

3. Enter the appropriate discount rate

4. Click Update asset details

You will now notice the discounted valued of the entity will be displayed on the Entity overview page underneath the entity net value amount. See the FAQ for further information on how discounts on ownership stakes in business entities are calculated.

Modeling discounts in the estate waterfall

Discounts applied to entities will be factored in the estate waterfall tax calculations where we consider the discounted value of entities when summing up the total taxable estate for estate tax purposes. For example, when an entity is distributed to a recipient trust, the recipient receives the full (undiscounted) value of that entity. For estate tax purposes, however, if the disposition is taxable, we use the discounted value to calculate the estate tax owed at that moment in time.

In addition, when modeling a transfer (gift/transfer, GRAT, installment sale, or intra-family loan), we acknowledge the discounted value of the entity or asset being transferred and calculate any gift taxes based on the discounted transfer value. If desired, there is also an option to override and apply a custom discount rate for hypothetical transfers.

FAQ

1. How is the effective discount calculated when an entity has an ownership stake in another entity?

   1. The method for calculating the discounted value of the parent entity involves applying ownership discounts to assets like business interests, and then adjusting for any additional valuation discounts, resulting in an effective discount rate based on the combined discounted value of all assets.

      1. For example, a Revocable trust with a market value of $13M owns the following assets:

         1. $10M non-business assets

         2. $3M ownership in an L.P. with a 25% discount

      The discounted value of the L.P. is $2.25M. Adding this to the $10M of non-business assets, the net value of the Revocable trust is $12.25M. The effective discount on the Revocable trust is therefore 5.77%; (1 - $12.25M/$13M)*100%.

      If additionally the Revocable trust also has a valuation discount of 25%, the discounted value of the Revocable trust is $9.18M (25% of $12.25M), making the effective discount on the Revocable trust therefore 29.33%.

2. Can I model a valuation discount for hypothetical strategies? How does it work?

   1. Yes, valuation discounts can be applied to the following hypothetical strategies: installment sales, intra-family loans, and GRATs.

      1. For sales and loans, the note payments will be based off of the discounted value of the sale or loan amount.

      2. For GRATs, the annuity payments and remainder interest will be adjusted to account for the discount upon funding.

3. Do valuation discounts carry through death events?

   1. Discounts do not carry forward to the next death. For example, if an entity is passed via marital trust at the first death, and the estate tax is deferred until the second death, the discount is not assumed to apply again when calculating taxes at the second death. An exception to this is business entities—if a business interest is passed, discounts may continue to apply.