Minimizing transfer tax costs

Limited partnership valuation discounts are often used when individuals try to minimize transfer tax costs when considerable unrealised capital gains exist. This can be the case when a founder wishes to transfer ownership of the company to a new generation. On this page, we discuss how a limited partnership can be used for minimizing transfer tax costs. This approcah is particularly popular when performing a wealth transfer to a next generation.

Minimizing Transfer Tax Costs

Limited partnership valuation discounts

The best way to minimize transfer tax costs is by creating a limited partnership. This approach can reduce taxes on existing appreciation. The founder can establish a limited partnership to hold the business and serve as a general partner while gifting the limited partnership interests to a future generation. The partnership will own the business and, as a general partner, the founder can continue to make all the business decisions. 

The tax value of the limited partnership interests can be reduced for gift taxes because they lack marketability and control. In this case, a discount for lack of marketability (DLOM) and a discount for lack of control (DLOC) can be calculated and applied. Details on estimation methods for both discounts can be found on the respective pages. A total discount of up to 60% is plausible and may considerably lower gift taxes.

Future appreciation in the value of the limited partnership positions will be taxed to the limited partners rather than to the founder. This moves the tax burden on future appreciation to the limited partners. 

Note that this approach does not generate any cash that the founder can use to diversify a concentrated position. A related approach is an estate freeze. An estate freeze however, does not lower gift taxes on existing unrealised gains.


We discussed the use of a limited partnership to lower gift taxes. By applying a DLOC and DLOM, minimizing transfer tax costs is possible.