A family in Brooklyn owns a portfolio of commercial properties, held within a single family-run LLC. When the patriarch passed away, his 40% interest was, on paper, valued at 40% of the company’s total worth. His heirs, however, quickly discovered a harsh reality. They could not force a sale of the buildings, they could not dictate management decisions, and there was no public market where they could easily sell their minority stake. The on-paper value and the real-world value were two very different numbers. This gap is not a problem—it is a core planning opportunity.
For families with significant assets tied up in closely-held businesses, real estate, or partnerships, this is a familiar situation. It is also the foundation of one of the most effective strategies for preserving generational wealth: the valuation discount.
The Real Value of an Asset
The term “discount” can be misleading. This is not a coupon or a sale. A valuation discount is a legitimate, market-based principle recognized by the IRS and the courts. It acknowledges that certain assets are worth less than their simple fractional value because of inherent limitations. My work with families and executives across New York often involves two primary types of discounts:
- Discount for Lack of Control (DLOC): A minority interest in a private company is worth less per share than a controlling interest. A 49% owner cannot direct company policy, approve a sale, or hire and fire executives. That lack of control makes the ownership stake less valuable to a potential buyer than a 51% stake.
- Discount for Lack of Marketability (DLOM): Shares in a publicly traded company can be sold in minutes. An interest in a family-owned real estate LLC, however, has no ready market. Finding a buyer can take months or years, and the process is complex. This illiquidity reduces the asset’s fair market value.
When combined, these discounts can be substantial, reflecting the economic reality of owning a non-controlling, illiquid asset. This is not about hiding value; it is about accurately assessing it.
How Trusts Implement This Strategy
Recognizing the discount is only the first step. The legal instrument that puts this principle to work for your legacy is typically an irrevocable trust. The strategy involves transferring discounted assets into the trust as gifts for your beneficiaries.
Here is a simplified example. You might transfer a minority interest in your family business, valued at $1 million on paper, to an irrevocable trust for your children. A qualified appraiser might determine that, due to lack of control and marketability, a 35% discount is appropriate. For gift tax purposes, the value of your gift is not $1 million, but $650,000. You have successfully transferred the full asset while using significantly less of your lifetime gift and estate tax exemption.
This is stewardship in action. It is a deliberate plan to pass on a family enterprise or property portfolio to the next generation with the lowest possible tax friction, preserving the capital that allows the legacy to continue. The structure of these trusts must be flawless. A trustee managing these unique assets has specific responsibilities and powers, which we define with careful reference to New York’s Estates, Powers and Trusts Law (EPTL), such as the fiduciary powers outlined in EPTL § 11-1.1.
This Is Not a DIY Project
I must be clear: valuation discounts are a primary focus of IRS audits. The tax court is filled with cases where families applied discounts that were deemed too aggressive or, worse, were not supported by a credible, independent appraisal. The IRS will challenge valuations that seem arbitrary or lack a defensible methodology.
Success depends on a coordinated team. As your attorneys, we work alongside qualified business appraisers and your tax advisors. The appraiser’s report is the foundation—a detailed, objective analysis that justifies the specific discount percentages applied. Our role is to build the legal framework—the trust and transfer documents—that can withstand scrutiny.
This planning is not a last-minute fix. It is a proactive, intentional process for families who see themselves as custodians of generational assets. It requires foresight and a commitment to getting the details right. When done correctly, it is one of the most powerful tools available for protecting a family’s life’s work from excessive taxation.
If your family holds significant assets in a closely-held business or a real estate partnership, the first step is a formal valuation review. We can coordinate with your financial advisors and qualified appraisers to determine if this strategy is a prudent part of your legacy plan.
