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Valuation Discount Back to Top

A reduction in the value of an interest in a business or other entity because of a lack of control, lack of marketability, etc. For example, you and a partner transfer a $500,000 building to a limited liability company (LLC - see separate definition). You gift 1% of the value of the LLC to your son. 1% of the underlying building is worth $5,000 (1% x $500,000). However, 1% of the LLC which is what you gift is worth only $3,000, based on an evaluation by an appraiser. The $2,000 reduction in value, called a "discount", reflects the fact that your son will have a very difficult time selling the 1% ownership interest.

Value Back to Top

For purposes of making a gift of an LLC, you must determine the value of the interest given away. For tax purposes, the fair market value (see above) is the value to use.

Voting Stock Back to Top

Stock, or ownership interests in a corporation can often vary in many ways. A fundamental manner in which the rights of different shareholders can vary is by voting rights. Its common in a closely held business to have some shares authorized to vote, and other shares not authorized to vote. Even S corporations (corporations with special tax status that permits income and deductions to flow through to the individual shareholders) can vary based on voting rights.

Voting Trust Agreement Back to Top

Shareholders of some portion or all of the stock of a corporation may sign an agreement, referred to as a "Voting Trust Agreement" in which they authorize a named person to vote shares of stock for them. This can be used to keep certain blocks of stock voting together. For example, the Smith and Jones family each own 50% respectively of the stock in ABC Corporation, Inc. Mr. Smith has given shares of stock to his wife and children in order to achieve various tax and other objectives. However, he realizes that if a child refuses to vote his way, the 50/50 split that has served the company throughout its history could be undermined. So, Mr. Smith and all the Smith family shareholders sign a voting trust agreement giving Mr. Smith the authority to vote their shares. Exercise caution in using such an agreement there are a host of tax and legal issues. In particular, consult with your estate planner about Code Section 2036 issues (in English, this could cause all the shares to be taxed in Mr. Smith's estate even if he made gifts of them).