Sharing the wealth within the family, with senior family members in full control as asset managers, has developed as an extremely effective means to leverage use of annual $10,000 gift tax exclusions and $600,000 estate tax-free asset values. The concept of estate fractionalization, achieved through inter-vivos asset transfers among family members, allows sales, gifts and eventual estate transfers all to be discounted by as much as 50% from total asset value -- even though the assets are 100% owned by the family as a whole. Recently, Treasury issued Revenue Ruling 93-12 (January, 1993) that validated minority or non-controlling interest discounts applicable on a per-gift basis even though the donor(s) and donee(s) together own 100% of the business or investment entity equity. Where a decedent's estate includes less than the entire equity of a corporation or partnership, the same principle is applicable: There is no attribution or unity of family ownership to be applied to defeat otherwise supported discounts. So the strategic plan for many families ideally will include fractionalizing capital, while maintaining control and family allocation of income.

The tax concept of fair market value requires both taxpayer and Government to determine value according to a hypothetical, free market standard. And a hypothetical buyer and seller must be considered so family relationship is irrelevant (as made clear in gift tax situations by Rev. Rul. 93-12). This is to the advantage of families seeking to share wealth on a mutli-generation basis. Thus, for example, if a parent gifts an undivided one-third interest in $1 million of land to a child, the gift should be valued at $333,000, less a fractional interest discount of 20%-30%. Later, upon the parent's death, a similar discount would be available to the parent's estate as only a two-thirds property interest is included therein! Actually, the term valuation adjustment is preferable since we are seeking the correct fair market value of the specific interest to be valued.

As part of the Revenue Reconciliation Act of 1990, Congress confirmed the viability of fragmented ownership discounts, fully recognizing that the courts generally have approved corporate and partnership equity discounts (non-marketability, minority interest, and other types) often aggregating 40% or more in relation to underlying business or asset value. Applying this principle, a married couple's permitted estate tax-free values totaling $1.2 million might really be structured at upwards of $2.5 million in asset value using inter-vivos gifts. Further, using inter-vivos or lifetime gift transfers also allows 100% of post-gift appreciation on asset transfers to escape gift and estate tax. As a final note, special types of trusts can be utilized to leverage tax-free gifts through use of mortality tables (IRC Section 2702). Using such trusts, e.g., the Grantor Retained Annuity Trust (GRAT) can leverage further the benefits of fractionalized partnership equity interests.

All in all, for estates over $2 million, valuation discount planning can be the most effective estate tax savings approach, provided the estate owners and their advisors follow the rules for playing the valuation game. Among the rules of the game are proper documentation of asset transfers, credible evidence (usually via business valuation appraiser's report) supporting discounts, and real substance to transfers recognizing the existence and rights of transferees as owners, even though subject to restrictions.