WEALTH TRANSFER
The federal government, along with some state governments, impose a transfer tax – a tax on transferring assets when alive (gift tax) or at death (estate tax). There are some basic credits available consisting of (a) the annual gift exclusion of $12,000 per person per done and (b) the $1,000,000 lifetime gift exemption with an additional $1,000,000 at death. While useful, the credits are modest in size, and even with leverage techniques, do not have a significant impact on transfer taxes for many exceptionally wealthy families.   

LEVERAGING
While modest, the annual and lifetime transfer tax credits can be enhanced through leverage. The government imposes a transfer tax on the asset’s fair market value. To achieve leverage there are techniques to make the fair market value artificially lower.  When a family owns assets in most forms (personal, joint, tenants in common, corporate, general partnership, etc.) the fair market value is what the asset would sell for. 

Alternatively, you can use entities to own assets (often limited liability companies, family limited partnerships, corporations with non-voting stock) which concentrate control and rights into a few shares and the majority of shares are non-voting and have significantly reduced rights. The non-voting shares are worth considerably less due to their lack of vote, lack of marketability, and lack of liquidity. 

The IRS has acquiesced to the discount and it is common to see discounts of twenty to forty percent thus effectively allowing a family to transfer significantly more, but of equal or greater importance, to also remain in control of the asset (only non-voting shares are transferred). 

An example of a real case: family owned a small technology company that generated strong reviews for their recent work and was starting to generate interest among buyers.  The restricted stock of the company was worth approximately $2 million (documented via business appraisal). There was a good chance that if purchase or taken public the value could increase several fold. 

The family through the advice of their advisors used a family limited partnership to own the technology company stock and achieved a 40% discount (again documented by appraisal) for a net transfer value of $1.2 million. They then gifted the non-voting portion of the family limited partnership to a trust using about half the parents lifetime gifting credit. Eight months later the stock restrictions expired and the company went public and garnered $90 million. The result was the parents retained control; the $90 million was outside of their estate, saving almost $45 million in future death taxes, and in an insulated container.