A presently advantageous tax break is being able to transfer a greater amount of closely-held business interests to family members without incurring a gift tax. We may also shift partial business interests to our family member and further discount the value of the asset transferred using discounts for lack of marketability and lack of control. The Joint Committee created by the Budget Control Act of 2011 must propose revenue options by the end of 2011, NOT 2012. Since it takes time to prepare these estate planning techniques and impending tax changes can be retroactively applied to the date of the proposal of the tax change, now is the time to act!

Besides eliminating the temporary five-fold increase in the lifetime gifting limit from $1 million to $5 million, another lucrative tax break may be under attack — the ability to discount partial interests in business interests for lack of marketability and lack of control. Congress has discussed eliminating these tax breaks before and they are likely to be on the negotiating table of the twelve member joint committee. These combined benefits enable us to transfer more assets out of our name and into the names of family members or trusts for the benefit of family members, without incurring any gift taxes.

The following is an example of a gift of 10 percent of the closely-held business stock a parent (age 65) owns to each of his two children. The fair market value of the entire business is $5 million.

A gift of ten percent of the business stock to each child would be worth $500,000 each. However, under present law, one could apply a discount to that value for lack of marketability by about twenty-five (25%) percent, and lack of control for another twenty-five (25%) percent, thus reducing the gifted value for tax purposes further to $250,000 to each child. This gifted value is removed from the parents’ gross taxable estate upon death. Remember, this includes ten percent of the appreciated value of the business over the next twenty years too. Also, consider that Congress now must have revenue offsets with every enacted tax savings provision, so discounts for lack of marketability and lack of control — perceived “loopholes” — may become “old laws” at the end of next year.

Gross reduction in estate value: $1 million

Reduction in Gift tax exemption (after discounts): $ 500,000

Appreciation over 20 years, assuming 5% appreciation:

Tax savings – assuming death at age 85 (after 20 years) and a 35% estate tax: $125,654

Tax savings – assuming death at age 85 (after 20 years) and a 55% estate tax: $1,459,314