Could Valuation Discounting be the Key to Maximizing the 2023 Estate and Gift Tax Exemption?

March 31, 2023

By: Larry Leaf, CPA, PFS, ABV

At a glance

The main takeaway: While estate planning can be complex, if done correctly it can save taxpayers millions of dollars by incorporating valuation discounting in collaboration with the estate and gift tax exemption before it sunsets in January 2026.
Impact on taxpayers: Depending on your net-worth, you could be subject to substantial estate tax. However, utilizing valuation discounting to set up your estate plan could be the key to maximizing the estate tax exemption before December 2025.
Next steps: Aprio’s Income Tax and Estate Planning Services team can help you navigate the complexities and develop a strategy that utilizes valuation gifting to maximize the enhanced estate tax exemption.

Schedule a consultation with an Aprio Income and Estate Planning professional today.

The full story:

The estate tax exemption provisions laid out in the Tax Cuts and Jobs Act (TCJA) of 2017 have increased to nearly $13 million for 2023. While this is an exciting opportunity to gain significant tax savings, the exemption will be cut in half to nearly $7 million in 2026 and then adjusted for inflation.

Unless Congress extends the increased exemption, individuals planning on gifting part, or all of their estate will be subject to the 40% estate tax rate. This enhanced exemption should serve as a motivating factor for business owners to get their estate planning in order. While estate planning can be complex, if done correctly, it can save taxpayers millions of dollars.

Leveraging valuation discounting can help you maximize the estate tax exemption.

Depending on your net-worth, you could be subject to substantial estate tax. For example, if you are worth $20 million, you could be subject to a $2,000,000 estate tax, or let’s say you are worth $100 million, you might face a $35 million estate tax. Since estate and gift taxation is complex, it is important to connect with your estate planning advisor who can navigate you through the process.

If you’re a high-net-worth individual, taking the time to consider your estate planning options now is important because it will save you on paying a hefty estate tax later. A unique way to do this is by leveraging valuation discounting to pass on wealth because it can help to substantially reduce the value of your company in terms of gifting.

Discounting includes gifting a company that is either closely held or a minority interest, less than 50% of a company. Closely held companies are less liquid than public companies since it is often harder to sell a company that cannot be sold on a securities exchange and are worth less than equally profitable public companies.

Imagine for a moment that you are going to buy a business, but you’d only be purchasing one-third of the business as someone else owns the remaining two-thirds. You wouldn’t want to pay the full amount for the business because the other person has the control to make all the decisions. That’s what discounting is about. By gifting a minority interest, you can value it for less than the entirety of your business and receive a discount since you are gifting a portion that someone can’t use to control the business. In estate planning, $9,000,000 plus $9,000,000 can equal $12,000,000 million or less if discounting is used properly.

Bottom line

Estate planning and valuation discounting are complex. If you want to use discounting to maximize the enhanced exemption, the time to act is now.

You don’t have to navigate these complexities alone. Aprio’s Income Tax and Estate Planning Services team can help you develop a strategy to maximize your gift exemption before it drops back to 2017 levels by utilizing valuation discounting for your business. Contact us today to schedule a complimentary consultation.