How owners of closely held businesses can use minority valuations to lower estate taxes.

• Author: Rabun, Larry
• Position: Brief Article

Owners of family companies can now reduce their estate tax obligations by giving minority interests of company stock to children or other relatives at discounted values, thanks to Rev. Rul. 93-12.

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.

Gift benefits

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...