When you gift assets to children, the value of the gift is what matters. Cash is simple. Fifteen thousand dollars is fifteen thousand dollars. Interests in a business or real estate holding company are different, especially when the gift is a minority slice.
What a Valuation Discount Is
If I give you 100 percent of a business worth one million dollars, your stake is worth one million. If I give you only 20 percent, it is not automatically worth two hundred thousand. A minority investor lacks control. You cannot dictate major decisions or force a sale. That loss of control reduces value.
There is also marketability. Cash can be used immediately. A minority interest in a private entity is much harder to sell. It may take years to find a buyer, if one exists at all. That lack of marketability also reduces value.
Put those together and a minority, illiquid interest is worth less than a pro rata share of the whole. That reduction is the valuation discount.
Two Main Drivers: Lack of Control and Lack of Marketability
- Lack of control. Without voting power or control rights, an investor cannot direct distributions or exits. A rational buyer pays less for that position.
- Lack of marketability. Private interests do not have a ready market. Time, effort, and uncertainty lower what a buyer will pay today.
Why Families Often Gift LLC Interests
An LLC that holds several properties lets you transfer a single ownership interest rather than pieces of each property. If you gift a minority, non-controlling interest in that LLC, the value of the gift reflects both the limited control and the difficulty of selling that stake. That can reduce how much of your lifetime exemption the gift consumes.
Do Not Stretch the Discount
This area invites scrutiny. Because discounts reduce the reported value of a gift, the IRS will look closely at how you calculated them. The solution is straightforward. Use an independent valuation. Document the facts that support any discount. Be careful about advice that sounds too good to be true. The goal is to reflect real economic limits on control and liquidity, not to game the system.
When Discounts Make Sense
Discounts are most appropriate when the facts match the economics: a real minority interest, real limits on transferability, and underlying assets that are not easily sold. In that setting, a well-supported appraisal can align the gift’s reported value with what a willing buyer would actually pay.
Conclusion
Valuation discounts are not a loophole. They recognize that a minority slice of a private entity is worth less than a proportional share of the whole. If you plan to gift interests in a family LLC, focus on substance. Structure the ownership interest thoughtfully, obtain an independent valuation, and keep your documentation clean.
This post is adapted from a recent episode of the Scholar Wealth Podcast. For more perspective on valuation discounts for family LLC gifts, listen to the full podcast episode here.