Working Paper: NBER ID: w9456
Authors: James Poterba; Scott Weisbenner
Abstract: This paper explores the effect of discretion in estate valuation techniques on the effective estate tax burden on different asset classes. For some assets, such as liquid securities, there is relatively little discretion in valuation. For other assets, such as partial interests in closely-held businesses, family limited partnerships, and real assets or collectibles that are traded in thin markets, estate valuations may be more difficult to establish. Estate tax filers may therefore be able to select valuations that reduce the reported value of the estate assets, and therefore the effective estate tax burden. In 1998, estates that invoked the doctrine of minority discounts' in valuing non-controlling interests in limited partnerships claimed an average discount of 36 percent for these assets, relative to their estimated market value. More than half of all limited partnership assets reported on estate tax returns were valued using this doctrine. This suggests that for a given statutory estate tax rate, the effective estate tax burden may be greater on assets that are easily valued than on difficult-to-value assets. A comparison of the mix of assets reported on estate tax returns, and the mix the estate tax returns would be predicted to hold, given data from the Survey of Consumer Finances, is consistent with lower relative valuations for difficult-to-value assets.
Keywords: Estate Tax; Asset Valuation; Minority Discounts
JEL Codes: H2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| discretion in estate valuation techniques (D14) | effective estate tax burdens (H24) |
| minority discounts (L42) | effective estate tax burdens (H24) |
| minority discounts (L42) | effective estate tax rates on difficult-to-value assets (H24) |
| composition of assets reported on estate tax returns (D14) | expected asset distributions based on SCF data (G35) |
| effective estate tax burden on liquid assets (H24) | minority discounts (L42) |