Copyright © 2009 EBS Responsible Wealth

The sale of a Minority Interest in S Corporation Stock (S Minority) to a Grantor Trust (GT) is a concept that is based upon utilizing a number of legal principles that otherwise would not be connected.  The appeal of this technique is that it uses rules that are mandated, based upon the relevant provisions of the Code, revenue rulings, and case law. Creative planning and careful drafting of legal documents are at the heart of this concept.

Copyright © 2009 EBS Responsible Wealth

The sale of Family Limited Partnership (FLP) interests (see our separate explanation of a FLP) to a Grantor Trust (GT) (see our separate explanation of a GT) is a concept that is based upon utilizing a number of legal principles that otherwise would not be connected.  The appeal of this technique is that it uses rules that are mandated, based upon the relevant provisions of the Code, revenue rulings, and case law. Creative structuring, financial modeling, and careful drafting of legal documents are at the heart of this concept.

Copyright © 2009 EBS Responsible Wealth

A minority interest in an S Corporation should be entitled to a valuation discount for both estate and gift tax purposes. The basis for the discount is lack of control and lack of marketability.

In general, the value to be used is the fair market value determined on the basis of what a willing buyer and a willing seller would pay, when neither is under any compulsion to buy or sell, and both parties are fully informed as to the relevant facts.  This valuation standard is applied without regard to what interests or other considerations may apply to a donee or transferee.  Because of this, significant discounts are usually applied to transfers of minority interests even when those interests are transferred to family members who control the business, or end up in control of the business as a result of the transfer.

Copyright © 2009 EBS Responsible Wealth

A Family Limited Partnership (FLP) is a limited partnership that is organized under state law, whose partners are family members. A partnership is usually formed with one or both parents owning all or most of all the limited partnership interests and all or a portion of the general partnership interests. FLPs have a number of advantages.  The non-tax reasons for doing a FLP are significant and important to support the legitimacy of the business entity if challenged by the IRS.