How owners of closely held businesses can use minority valuations to lower estate taxes.
The key to the change is agreement by the Service to allow such stock gifts to be reduced in value based on being minority interests. Before Rev. Rul. 93-12, the IRS position was to value minority interests of family stock as a percentage of the total company value, because the stock stayed in the family.
For estate and gift tax valuation purposes, the Service will no longer assume that all voting power held by family members may be aggregated for purposes of determining whether transferred shares should be valued as part of a controlling interest. The following hypothetical example illustrates the effects of the change.
Example: The owner of a family business valued at $5,000,000 decides to make three equal gifts to his children of $1,000,000 each of company stock. Under prior rules, each child's stock would have been valued at $1,000,000, because control of the corporation was considered to have remained with the family unit.
Under the new rules, each child's 20% interest in the company is considered to be a minority interest, valued at 25% to 40% less than a controlling interest. Thus, each child's gift would lose $250,000 to $400,000 of value, giving it a value of $600,000 to $750,000.
The main effect is that the owner becomes a minority shareholder, with 40% of the company's stock, reduced in value by 25% to 40% for estate tax purposes.
It is now easier to give away one's interest in a closely held business at a lower value than before. It also helps to keep a closely held business in the family. Owners will now have an incentive to make gifts by looking at the value of the stock to the recipients rather than to the owners.
Moreover, the change also applies to gifts of partnership interests, trust interests and even property interests, such as joint tenants, tenants by the entireties and tenants in common in real estate.
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|Publication:||The Tax Adviser|
|Article Type:||Brief Article|
|Date:||Mar 1, 1994|
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