As with most things in life, when things are bad, there usually is something good that can come out of it.  Our current economic troubles have resulted in many closely held or small businesses being worth far less then they used to be.  This is not a good situation for businesses that are hanging on to survive or have to be sold for various reasons.  However, for people wanting to minimize estate and gift taxes and have been putting off taking a cold hard look at their estate plan, now may be the perfect time to explore the gifting of shares in their businesses.

For example, some businesses have senior family members who own all or most of the shares of the outstanding stock of their corporation.  With the value of the business being down right now, more shares could be gifted to younger family members involved in the business.

Example:  Mr. Senior owns 80% of Deflated, Inc., while his two sons who work in the business own 10% each.  Deflated was worth $3,000,000 in 2007.  By the end of 2008, it was worth $2,500,000.  Mr. Senior talks to tax counsel and after exploring the tax strategies and planning tools discussed below decides to gift 20% of his shares worth $500,000 to each of his sons, leaving him with a 40% stock interest.

The tax advantages are as follows:

1.  The stock gifted to each son was previously worth $600,000. The current market value of such stock to each son is now only $500,000.  If Deflated, Inc. goes back to its value once the economy recovers, then Mr. Senior has just transferred $200,000 ($100,000 to each son) to his sons estate and gift tax free.  At a current marginal estate tax rate of 45%, Mr. Senior’s family can save $90,000 (45%*$200,000).

2.  The gifts to each son are gifts of a minority interest in Deflated, Inc. and such gifts lack marketability due to the limited market for such shares.  Estate and gift tax rules allow discounts for these factors that reduce the value of assets transferred.  (Caveat: There are some legislative proposals being floated in Washington seeking to limit this tax strategy. Stay tuned.) These discounts for minority interests and lack of marketability conservatively can be 25%, sometimes more.   With such discounts the gift of each $500,000 is reduced by $125,000. At a current marginal estate tax rate of 45%, Mr. Senior’s family can save another $112,500 (45%*$250,000).

3.  Outright gifts of stock are eligible for the annual donee exclusion of $13,000.  In addition, Mr. Senior has a spouse who will join in this gift, which will allow for a second $13,000 exclusion.  So the taxable gift to each son is now reduced by $26,000 (Mr. Senior’s annual exclusion of  $13,000 and his spousal joinder of another $13,000).  Additional savings to the family is $23,400 (45%*26,000*2 sons).

4.  If Mr. Senior makes no further gifts and dies with his reduced ownership interest of 40%,  his estate can claim the minority interest and lack of marketability discounts against his remaining shares.  If Mr. Senior dies in 2014, when deflated is worth $4,000,000, his family can take a 25% lack of marketability/minority interest discount, saving his family another $180,000 (45%*$400,000 marketability/minority interest discount[$1,600,000 forty-percent interest*25%]).

Bottom Line:  Mr. Senior can take advantage of the lousy economy, the lack of marketability and minority interest discounts and the annual donee exclusions with a spousal joinder to save his family a tremendous amount of future estate and inheritance taxes.

Caveat:  Remember that this type of planning depends on the particular factual setting of each client.  One difference in the facts can change the outcome.  Also, be aware that state inheritance taxes have not been considered in the above example.  Finally, the above should not be considered as legal advice.  Please consult with tax counsel to discuss your particular factual situation.

Copyright © 2009, Steven J. Fromm.



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  8. I hear that the bill designed to limit discounts isn’t going anywhere. This is the third year in a row it has been introduced and the sponsor was obviously counting on a more receptive atmosphere this time around. He didn’t plan on the resistance he would get from his own party. One estate planning attorney client of mine put it this way, “it’s all going to come down to how many members of congress have FLPs.”


  9. This time is a great time to use depressed values and discounts for uncertain economic times to make inter-family transfers. The discounts available often make sales to irrevocable grantor trusts for the benefit of children or grandchildren an incredibly effective tool.

    We’ve also been able to map out really good results using charitable lead annuity trusts for clients who have unpleasant ordinary income they are being forced to recognize (say from forgiveness of indebtedness) and are able to structure the clat to primarily recognize qualified dividends and capital gain. We ordinarily set the clat term to zero out (or close to it) for gift tax purposes and have the remainder pass to the younger generation.

    A charitable gift which may be later redeemed can be a good strategy for the charitably minded, primarily for those with ‘C’ corporations or with ‘S’ Corps or LLC’s and otherwise subject to employment tax on earnings. Since the gift and redemption need to be at fair market value — the goal is really to have the donation and repurchase price be the same. Whether that amount is temporarily depressed is not helpful.

    Joel S. Weissler, LLM (Taxation)*
    Attorney at law

    *California Bar Board of Legal Specialization Certified Tax Law Specialist

    Weissler Law Group
    3333 Camino Del Rio South #235
    San Diego, California 92108

    Phone: (619) 281-1888

    DISCLAIMER: Nothing in this post or transmitted by email should be interpreted as legal advice unless I have been retained and you have made a deposit towards my fees. This post is intended to help the person posting the question to ask the right questions with the attorney of their choice. This posting is for educational purposes only. Your time to act may be very limited and this could substantially reduce your rights and options. Do NOT rely on anything I have written here — You should contact a lawyer in your area immediately after reading my posting.

    The following disclosure is required pursuant to IRS Circular 230: unless otherwise expressly indicated, any federal tax advice contained in this communication, including attachments and enclosures, is not intended or written to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.


    • Joel: Great comments looking to the charitable angle while using the tools discussed in my article. Your comments illustrate how important it is to understand a clients’ needs and goals and then carefully implementing them. Where clients are charitably minded, your well thought out strategies would be quite effective and would meet their overall goals. Thanks for you comments.


  10. You couldn’t be more right. The last six to eight months have been a golden opportunity for this type of planning. However, people got scared and stopped the giving part of their estate planning. A few attorneys I work with have relayed situations they’ve encountered in which long term giving programs have been suspended by clients with 9 figure net worths. If those types of clients are suddenly worried about holding on to enough to live on, you can imagine how the person with the average taxable estate feels. That said, I have begun to see some signs of a thaw in this type of planning. Let’s hope everyone doesn’t wait until it’s too late to take advantage of the decline.

    Warren Neel President of Highgrove Advisors – Business Valution & Corporate Finance Consulting


    • Warren, I have seen this procrastination too. My fear is that new legislation may cut back on the minority interest and lack of marketability discounts. Or Congress may decide to impose attribution rules in this area.

      So we need to constantly educate our clients and attempt to influence them to take advantage of these current tax planning opportunities


  11. Another approach to consider is the sale of a minority interest to an ESOP in advance of any transfer strategy. An ESOP is a qualified retirement plan that is permitted to own and borrow money to acquire the stock of the sponsor company. In a leveraged ESOP transaction, the company lends money to the ESOP to buy the shares from the sellers. Post transaction, the Company has more debt without a concurrent reduction in the number of shares outstanding as one would see in a leveraged redemption. As a result, the per-share value of the Company’s stock is significantly lower immediately subsequent to the closing of the transaction. Gradually, as the debt is repaid, the stock price recovers (all other factors being equal). As a consequence, the timing for stock transfers – whether through an outright gift or a sale – are most opportune immediately after the closing of the sale to the ESOP.

    While an ESOP deal shouldn’t be done exclusively for estate planning purposes, it is a nice ancillary benefit to doing an ESOP deal and estate planning considerations should be examined when considering and planning an ESOP transaction.


    • Great comments Eric. In the right situation, your ESOP strategy could work out quite well. This strategy would provide cash to Mr. Senior in my example, perhaps aiding his liquidity needs. However, if the focus is on reducing the size of his estate using the tax strategies discussed, the ESOP strategy would result in him replacing his shares sold with cash or notes receivable. This would not reduce the size of his estate. However, it would probably result in any of remaining shares of his estate qualifying for the minority interest and lack of marketability discounts. The bottom line here is that your strategy is another option for senior clients to keep in mind.


      • Steve:

        The liquidity provided from the transaction can be useful in certain types of estate planning vehicles. As such, the ESOP not only serves to reduce the value of his remaining interest in the company (which can then be gifted to heirs at a much lower valuation, particularly if minority interests are transferred) but it can provide the liquidity necessary to implement a well designed estate plan.


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