Can Gifting Private Company Stock Reduce Estate Taxes Using the Lifetime Exemption?

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Why Is Gifting Private Company Stock Such an Effective Estate Planning Strategy?

The core advantage is simple: gifting private company stock during life can remove both the transferred shares and their future appreciation from the donor’s taxable estate. For 2026, the federal annual gift tax exclusion is $15 million per individual, so a married couple may have as much as $30 million of combined exclusion available if both spouses have their full exclusions. Using the lifetime gift tax exemption can therefore shift substantial business value before additional growth occurs. Because federal estate and gift tax rates can reach 40%, moving appreciating assets outside the estate can materially reduce future exposure. The tradeoff is that exemption used for lifetime gifts generally reduces the amount remaining available at death.

How Do Minority Interest and Marketability Discounts Reduce the Taxable Value of the Gift?

A minority interest in a private company usually cannot control management, dividends, asset sales, or liquidation. A buyer may therefore pay less than the interest’s proportional share of the company’s total value. This reduction is commonly referred to as a minority interest discount or discount for lack of control.

A private-company interest may also lack a ready market. Finding a buyer can take time, require negotiation, and create uncertainty. These factors may support a separate discount for lack of marketability, which can apply even to some controlling interests.

How Should the Gifts Be Structured to Transfer the Maximum Amount?

The process usually begins by deciding how much ownership the donor can transfer while preserving any desired voting or economic control. Counsel should review shareholder agreements, buy-sell provisions, transfer restrictions, consent requirements, and the estate plan before shares move. A valuation professional then values the specific interest being transferred as of the gift date. The donor executes the transfer, updates company records, and reports the gift as required. The annual gift tax exclusion is $19,000 per recipient in 2026 for qualifying present-interest gifts. Gifts exceeding the annual exclusion generally use the donor’s available lifetime basic exclusion amount, rather than automatically triggering gift tax. Timing matters because once a gift is completed, subsequent appreciation on those shares generally belongs to the recipient and is outside the donor’s gross estate.

What Does the IRS Look for When It Reviews a Gift of Private Company Stock?

The IRS focuses heavily on whether the reported value can be defended. For closely held stock, that means documenting the company, the interest transferred, the valuation date, financial information, ownership rights, transfer restrictions, comparable data, valuation methods, and the rationale for discounts. IRS guidance recognizes the asset, market, and income approaches to business valuation and instructs examiners to evaluate the nature and extent of claimed discounts. Properly prepared Gift Tax Returns should clearly disclose the transfer and attach required valuation information. Adequate disclosure is important because it generally starts the limitations period for the IRS to challenge the reported gift value. Weak documentation can leave both the valuation and the resulting tax position exposed.

What Happens to the Stock’s Tax Basis in the Hands of the Recipient?

Gifted stock generally does not receive a new tax basis equal to its fair market value on the gift date. For purposes of determining gain, the recipient generally takes the donor’s adjusted basis, with a possible increase for gift tax attributable to appreciation. Special rules apply when the stock’s fair market value at the time of the gift is below the donor’s basis. This carryover basis rule can create a meaningful future income tax cost. If low-basis founder stock is transferred after years of appreciation, the recipient may inherit substantial built-in gain and owe capital gains tax when the shares are later sold. Estate tax savings should therefore be evaluated alongside the recipient’s future income tax exposure.

For owners of appreciating private companies, the real planning opportunity is not simply transferring as many shares as possible. It is finding the right combination of ownership transferred, defensible valuation, available estate tax exemption, retained control, and income tax consequences. When those pieces are coordinated before the transfer occurs, a family may be able to move substantial business value to the next generation while reducing the amount ultimately exposed to federal estate tax.

How BT Can Help

For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Jonathan Swartz, partner in Bennett Thrasher’s Trusts & Estates Planning, or call us at 770.396.2200.

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