Last week we saw that Nils's gift of $500,000 to a trust for relatives in 2012 was likely to yield about $200,000 in tax savings, by getting future gain and income out of his estate, and by avoiding State estate tax altogether. There is another potential benefit of current law that Nils did not take advantage of this time, having to do with the valuation of certain kinds of assets.
Let's say that instead of giving cash and securities, Nils had given a 25% interest in a $2 million investment partnership (or limited liability company) to the trust. Wouldn't this still be a $500,000 gift? The answer is pretty clearly no. Why? It has mostly to do with marketability and control.
If someone gives you $500,000 in cash and securities, you can sell them and go out and buy a half million dollar yacht. Great, huh? However, if you got a 25% interest in a $2 million investment partnership instead, it would be evidenced by a piece of paper certifying your ownership, that you could not use to buy that yacht. You'd have to sell the partnership interest, or persuade the other owners to liquidate the entity. However, most partnership agreements restrict the ability to sell to any but existing partners, who might not be buying. And your 25% wouldn't give you enough of a vote to force a liquidation. For these reasons your interest would likely remain illiquid, and worth something less than $500,000 in sale value. How much less? An expert would probably say about 30% less. So instead of a $500,000 yacht you'd have a piece of paper worth $350,000.
The IRS doesn't like this idea, that someone like Nils can give away 25% of $2 million and call it a $350,000 gift. They deride this as "discount" that shouldn't be allowed. You with your piece of paper, though, might feel the valuation at less than $500,000 is pretty valid. You can't use it to get that yacht, and to make things worse, if your managing partner (over whom you have little control) makes some bad investment decisions, your gift might further decline.
So if Nils's gift to trust had been in this form, $150,000 less of exemption might have been used. At the current Federal gift and estate tax rate of 35%, that computes to a further savings of about $50,000.
Despite the seeming validity of this concept of valuing minority interests, Congress has made noises about disallowing it. It's a possible topic when the Federal estate tax is revisited next year.