September 23, 2021

Using a minority appraisal discount to reduce inheritance taxes

Although the current exemption from inheritance tax is quite high, a closed family business can cause your estate limit to be exceeded. Careful planning is needed to reduce or avoid tax altogether, and minority assessment discounts are a strategy.

Families who wish to pass on their business may face inheritance tax. Estates valued at over $ 11.7 million (as of 2021) are subject to federal inheritance tax. If you decide to sell your business before your death, you must take gift tax into account. The lifetime exclusion from federal gift tax – the amount you can give tax-free – is also $ 11.7 million (as of 2021). You can also give $ 15,000 to any number of other people per year (in 2021) without any gifts counting towards the lifetime limit.

One estate planning strategy to reduce estate taxes is to donate some or all of the ownership of a business to your children. When you transfer a minority stake in a company, that stake is not as valuable as the minority owner does not have the right to make all the decisions or vote on important matters concerning the company. This is called a “minority discount”. So, for example, if a business is worth $ 10 million, a 10% stake in the business would be reduced to less than $ 1 million. The amount of the discount depends on each individual case, but is usually between 10 and 40 percent of the undiscounted value.

By using discounts, you can reduce the value of your business for estate tax purposes while still giving your children a percentage of the business at a reduced rate. These discounts apply even if anyone with a stake in the business is a family member.

In 2016, federal regulations were introduced to eliminate this type of discount. The regulations were withdrawn in 2017, but under the new administration they may come back.

To find out if a minority valuation haircut is the right strategy for your family business, contact your lawyer.

Last modification: 07/27/2021


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