A commonly-used estate tax savings technique involves the creation of a partnership or similar entity to hold family investments, such as real estate and securities. The person who establishes such an entity may make gifts of minority interests to children, grandchildren or trusts for their benefit. For federal gift tax purposes, the value of such a gift may be discounted to take into account the lack of marketability and voting power of the gifted interests. Discounted gifting, based on concepts of fair market value, has been successfully used to pass assets from higher generation family members to lower generation family members at significantly reduced gift and estate tax costs.
The IRS, which has long been adverse to this type of planning, recently issued Proposed Treasury Regulations seeking to eliminate the ability to take discounts based on the lack of marketability and minority status of such interests. The Proposed Regulations may become Final Regulations sometime next year, after which they will be law. Until that time there may be a window of opportunity for those with potentially taxable estates and specifically including business owners, to use this technique to reduce federal transfer taxes.