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Absorption Discount Use in Estate Planning

In 2018, Agri-Management Services was hired to appraise one of the larger agricultural estates in Iowa that was subject to estate taxes. Due to the ownership structure, the traditional practices to reduce the value of the estate, such as minority interest discounts or special use, did not apply. However, the amount of land involved in concentrated areas, if all of the land were offered for sale, would “flood” the market. This would reduce the value of the land due to the excess supply. This concept is called a “blockage” or “absorption” discount, and has been applied to other large estates that have significant stock or real estate holdings in other parts of the nation.

We applied this concept to the estate using a time value of money approach to calculate the value of the estate. In 2020, the valuation was approved by the IRS. This resulted in millions of dollars in tax savings for the estate. Further research is needed to understand how “large” the estate needs to be to qualify for this discount. This could be another useful tool for estate planning, to reduce size of taxable estate.