For gift and estate tax purposes assets are valued at their full fair market value. When there is no public market for the assets an appraisal from a qualified appraiser is usually necessary to establish the value.

Sometimes the market value is not controlling. Discounts are available for certain ownership interests, such as business ownership interests, which are minority interests. Since a minority interest does not confer voting control it is considered to be worth less than a controlling interest.

Ownership interests can also be discounted for lack of marketability. A share of stock in a publicly traded corporation is easily sold, but a share of a private company is not. Other things being equal, the share of the private company is considered to be worth less.

If both lack of marketability and minority interest discounts are applicable discounts of 25-40% can often be applied. Of course the amount of the discount is a matter of expert opinion and is something which often has to be negotiated with IRS.

Business or other interest values can also be discounted because of restrictions on their sale. These restrictions are often found in shareholder, partnership or buy-sell agreements. For instance, the entity may have a right to reacquire the holder's interest at a set price. The holder of the interest then may be able to value the interest for tax purposes at that price rather than its market value. Section 2703 contains limits on this type of discount. The arrangement or restriction must be a bona fide business arrangement, it must not be a device to transfer property to family members for less than full value and the terms must be comparable to similar arrangements used in arms length transactions.

Sometimes asset values can be discounted under statutes providing for a special discount. For instance, under Section 2032A the value of farmland held and worked by a family as a farm for 5 of the last 8 years can be reduced up to $870,000. The statute provides a formula to determine the discount. It is usually in the 40-50% range. The land must constitute a specific percentage of the estate (25% or 50%) and must be used by a family member as a farm for 10 years after the death.

Donald M. Thompson * 55 W. Monroe #3950; Chicago, IL 60603 - Illinois Probate Lawyers
Ph: 312-782-0844 * Fax: 312-201-1436 * Email: donthompsonlaw@sbcglobal.net