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Washington Football Team Minority Partners and Estate Tax Planning


Sixty percent of the Washington Football team is owned by one person and forty percent by three other people. According to a recent news story, the majority owner unilaterally decided to withhold cash distributions and the dispute is now before an arbitrator chosen by the NFL commissioner.

I don’t know any of the combatants and don’t really care much how this is settled. What I find interesting is the reported total lack of control the minority owners have. I have been performing valuations for quite some time of minority interests in corporations, partnerships and LLCs and contend that minority interests are entitled to a discount from the proportionate value of the entire business because they lack control and further, for the difficulty in marketing such interests.

Primarily my valuations have been prepared for transfers intended for estate planning. Some of the transfers are to reduce eventual estate taxes, some to assure a line of succession intended by the majority owner and some to maintain family control, and some for all these reasons and some others too.

Gift giving to reduce eventual estate taxes is an important strategy. Here is a brief example to illustrate the benefits of taxable gifts and of even paying gift taxes now.

Assume no gift is made:

  • Assume a business is valued at $10,000,000 and is owned by one person.
  • Also assume his estate will be sufficiently large to be subject to estate tax.
  • When he dies the business will be included in his estate at the then-current value.
  • Assume further the value grows to $14,000,000 by the time he dies.
  • That $14,000,000 will be included in his estate.
  • His will provides that half of that business will be left to each of his two daughters who work in the business and pretty much run it.
  • The $14,000,000 will be subject to estate tax which I am assuming will be subject to a 50 percent combined federal and state estate tax and that the $7,000,000 estate tax will be paid out of other estate assets.

Assume a gift is made:

  • Assume owner makes a current gift of 45% to each daughter.
  • Also assume he set up those shares as nonvoting and he retained 10 percent and these were the only voting shares.
  • Each daughter would receive shares with an intrinsic value of $4,500,000 (45% of $10,000,000).
  • With a valuation for gift tax purposes, it can be assumed that the value of each minority interest would be reduced by about 33.33 percent or $1,500,000 so only $3,000,000 of the gift to each daughter would be subject to the gift tax.
  • Lets’ further assume that this owner already used up his annual exclusions and lifetime exemptions and would need to pay a 50 percent combined federal and state gift tax (because he lives in a state that has a gift tax) which would be $3,000,000 (50 percent of the total gifts of $6,000,000).
  • Now, let’s carry this forward to the time of his death. The business is worth $14,000,000 but he only owned 10 percent so only $1,400,000 will be included in his estate.
  • Note that 90 percent of the $14,000,000 would not be subject to estate tax by his estate.
  • Also note that the $3,000,000 already paid in gift tax would also not be included in his estate since it was previously paid.
  • Let’s also assume that 50% estate tax will be paid on the 10 percent he retained. That tax would be $700,000 (50 percent of $1,400,000).

Here is a recap:

With gift                           Without gift

Total tax paid when gift was made                                       $3,000,000                                      n/a

Estate tax paid when owner died                                             700,000                         $7,000,000

Total gift and estate tax                                                          $3,700,000                       $7,000,000

This is an oversimplified illustration, and there are other issues involved such as the lost income on the cash paid on the gift tax, or the payment of any dividends to the children which, if paid to the father, would end up in some manner in his total estate and be subjected to estate tax. Also, no valuation discounts would be available to reduce the taxable estate; and there might be an issue whether the 10% voting shares would be subjected to a control premium. Further, there might be other methods of reducing the eventual estate which would be more applicable in this situation.

Another issue is that the gift tax that is paid would be removed from the eventual taxable estate further reducing the overall estate taxes, while the estate tax would be paid from the total estate. Estate tax: Included in taxable estate. Gift tax: Excluded from taxable estate.  In the right situation, paying the gift tax can create a significant benefit.

The point of this blog is to highlight the very real issue of a minority owner not having any control and the discounts that should be made to the proportionate value of those interests to reflect that lack of control. A secondary point could be that today’s gifts remove tomorrow’s growth from the controlling owner’s estate.

Two related blogs are at https://www.withum.com/resources/the-value-of-a-gift-is-different-from-the-value-in-an-estate/ and https://www.withum.com/resources/heavy-duty-estate-tax-planning/.

For those fortunate enough to know that their estate would be subjected to estate tax, the sooner planning is done, the better the potential for a favorable result.

If you have any business or financial issues you want to discuss please do not hesitate to contact me at emendlowitz@withum.com.

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