SP&H was hired by an estate to determine the discounts for lack of control and lack of marketability that would be appropriate for two interests owned in a family limited partnership. The discounts resulted in significant tax savings to the estate.

The Family Limited Partnership

• Established in the 1990s for asset management purposes
• Primarily owned marketable securities
• The decedent's trust owned a 1% general partner interest and a 67% limited partner interest in the Family Limited Partnership

Valuation Discounts Illustration (40% Discount)

The partnership agreement stated that the general partner had full control over operations and management of the partnership. Nevertheless, Internal Revenue Code 2704(b) states that certain restrictions must be disregarded for valuation purposes when the restriction is more restrictive than state regulations. California's Corporation Code contained provisions that granted powers to limited partners when a majority interest is present (as was the case with the 67% limited partner interest). As a result, in certain circumstances the general partner required consent of a majority interest of limited partners to make decisions, so the general partner lacked total control. Moreover, although the underlying securities in the partnership were marketable and could be readily sold, the general partner interest lacked a ready market. These factors, in conjunction with others, resulted in discounts for lack of control and lack of marketability for the general partner interest.

With its majority limited partner interest, the 67% limited partner interest possessed some blocking powers against the general partner and some decision-making abilities amongst the limited partners. Nonetheless, the interest did not have the ability to influence day-to-day operations and decisions, resulting in a lack of control discount. Moreover, although the underlying securities in the partnership were marketable and could be readily sold, the limited partner interest lacked a ready market.

The combined effects of the discounts for lack of marketability and control resulted in estate tax savings for the decedent's estate.