For many years we and other perpetuation planners have been claiming minority interest discounts of 10% to 50% for transfers of property (like insurance businesses) to family members. While this has been done successfully, the transfers have always been at risk due to the assumption of unity of interest for family members. A recent IRS ruling has significantly enhanced the benefit of transferring assets to future generations.
Revenue Ruling 93-12 specifically dealt with interests in a family held business, confirming that minority interests in property can be transferred to family members at a reduced cost. While this ruling applied to the assets of a family business (like an insurance agency), we believe that it can also be used as substantiation for transfers of hard assets such as real estate and tangible personal property.
A lifetime gift of an interest in an asset could result in gift taxes. This IRS has historically permitted discounting of the fair market value of minority interests due to lack of marketability and lack of management control of the minority interest holder. In the past this discount was only available on gifts to non-family member transfers. On the other hand, the IRS refused to consider this type of discounting for family members because of the assumed unity of interest among family members.
After a series of losses in Tax Court, the IRS has reversed its position with Ruling 93-12. A minority interest is not available for transfers of minority interests to family members. For example, a parent owning an insurance agency can gift 20% of his corporation to each of five children and receive a minority discount for each transfer. Following this ruling, minority discounts should also be available for transfers of minority interests in any asset (i.e. real estate).
Please refer this revenue ruling to your accountant and tax attorney to determine if this may be an appropriate time to consider transferring assets in a tax beneficial way.