There is a concept in estate and tax planning called Discount for Lack of Marketability.  Discounting can save a family a ton of money in estate taxes if it applies.

Basically, it says that assets in a company are not as valuable as assets owned directly by a person. I go into this in more detail in my latest blog at http://www.legalees.com/discount-for-lack-of-marketability/, but suffice it to say that while the IRS will not let you discount a publicly traded stock like Exxon, stock in a closely held company is subject to discounting. The IRS recognizes that while your stock is worth a million dollars on the books of the company, in your hands it isn’t worth nearly that. So it lets you “discount” the value of your stock.

If you have an estate that is big enough to be subject to an estate tax, discounting becomes very valuable. 16 states have estate taxes that kick in at only $1 million dollars, often in the 16% range. If you live in one of those states and have a two million dollar estate, your state could take $160,000 from your family.

If one million in your estate is in real estate, you could put the real estate into a company.  Suddenly it isn’t worth as much money in the taxman’s view.  The value of assets in the company are measured by the value of the stock or ownership interests.

The discount on a small company is usually around 25%. In the example above, if you can reduce the taxable $1 million by $250,000, that discount would save your family $40,000.