Lack of Marketability Discount
Overview
A Lack of Marketability Discount (LOMD) is a valuation adjustment that reduces the value of an asset due to difficulties in selling it quickly and efficiently in the open market. In estate planning, this discount is particularly relevant when valuing closely-held business interests, restricted securities, or other assets that cannot be readily converted to cash.
Understanding LOMD in Estate Planning
Basic Concept
- The discount reflects the decreased value of assets that are:
- Not easily sold
- Have limited buyers
- Require significant time to market
- Face regulatory restrictions
Typical Applications
- Closely-held businesses
- Family Limited Partnerships (FLPs)
- Private company stock
- Real estate holdings in unique markets
Calculating the Discount
Factors Affecting LOMD
- Market conditions
- Asset characteristics
- Historical sales data
- Regulatory restrictions
- Time required for sale
Typical Discount Ranges
- Most LOMDs fall between 25% and 45%
- Specific circumstances may justify higher or lower discounts
Benefits in Estate Planning
Tax Advantages
- Reduced estate tax liability
- Lower gift tax implications
- Enhanced wealth transfer efficiency
Strategic Uses
- Family business transfers
- Charitable giving
- Generation-skipping transfers
Common FAQs
Q1: How is LOMD different from lack of control discount?
A: While LOMD focuses on marketability issues, lack of control discount relates to minority ownership positions lacking decision-making authority.
Q2: Can LOMD be combined with other discounts?
A: Yes, LOMD can often be combined with other discounts, such as minority interest discounts, when appropriate.
Q3: Does the IRS accept LOMD?
A: Yes, but the IRS scrutinizes the percentage claimed and requires proper documentation and valuation support.
Important Considerations
Documentation Requirements
- Professional valuation reports
- Market analysis
- Comparable sales data
- Economic condition assessment
Risk Factors
- IRS challenges
- Valuation disputes
- Market condition changes
Summary
The Lack of Marketability Discount is a crucial tool in estate planning that recognizes the reduced value of assets that are difficult to sell. Understanding and properly applying LOMD can significantly impact estate tax liability and wealth transfer strategies. However, careful documentation and professional guidance are essential to support the claimed discount and ensure compliance with IRS requirements.
Note: Always consult with qualified legal and tax professionals when implementing estate planning strategies involving LOMD.
Key Takeaways
- LOMD can significantly reduce estate tax liability
- Professional valuation is crucial
- Documentation is essential
- Multiple factors affect discount rates
- Combined use with other discounts may be possible
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Related Terms
Here are some related terms that are relevant to the estate planning term "Lack of Marketability Discount (LOMD)":
- Marketability: The ease with which an asset can be converted into cash. Assets with low marketability are subject to LOMD.
- Minority Interest Discount: A discount applied to the value of a minority ownership stake in a business due to the lack of control.
- Fair Market Value: The price at which an asset would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell.
- Valuation: The process of determining the fair market value of an asset, often conducted by professional appraisers.
- Estate Planning: The process of arranging the transfer of an individual's assets and property upon their death or incapacity.
- Gift Tax: A tax imposed on the transfer of property from one individual to another without adequate consideration.
- Estate Tax: A tax levied on the transfer of a deceased person's property to their heirs and beneficiaries.
- Family Limited Partnership (FLP): A type of legal entity used in estate planning to hold and manage family assets, often subject to LOMD.
- Restricted Securities: Stocks or other financial instruments that are not freely tradable due to regulatory or contractual restrictions.
- Closely-Held Business: A privately-owned business with a small number of shareholders, often subject to LOMD.
- Wealth Transfer: The process of passing on assets and wealth from one generation to the next, often involving estate planning strategies.
These related terms provide context and additional information to understand the concept of Lack of Marketability Discount in the field of estate planning.
