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Lifetime Gifting to Minimize Value of Closely Held Business Held Until Death

By April 15, 2025No Comments

Introduction

For many business owners, their company represents both a major financial asset and a personal legacy. As you build long-term wealth and think about the future of your business, it’s equally important to plan for how that wealth will be transferred—especially when it comes to minimizing estate taxes and preserving family harmony. One powerful estate planning strategy is lifetime gifting of closely held business interests. This approach allows you to gradually reduce the size of your taxable estate, retain a degree of control over your business, and potentially take advantage of favorable valuation discounts.

Lifetime gifting can serve a dual purpose: providing a structured path for transferring ownership to heirs while potentially reducing the tax burden at your death. Whether your goal is to keep the business in the family, reward the next generation for their contributions, or simply manage tax efficiency, careful planning and timely action are essential. This strategy is not without complexity, but when done correctly, it can result in significant financial and operational benefits.

What is lifetime gifting to minimize the value of your business interest?

One important estate planning strategy is to make gifts during your lifetime to achieve a smaller estate value at your death. While you are reducing your ownership in your business, you decide how much control you are willing to give up and when. You may be subject to gift tax at the time of the gift, but it is still possible to reduce your total tax liability through gifting.

Tip: This discussion concerns the general concept of gifting to reduce the size of your business interest.

Why would you make lifetime gifts?

  • You can reduce the value of your estate. The smaller the value of your estate at your death, the lower your potential estate taxes. Once you consider state estate taxes, the picture may look even worse. When you make lifetime gifts, you can control the timing and the size of the gift, and you may be eligible for valuation discounts on the taxable value of the gift that are not available at your death.
  • You can utilize the annual gift tax exclusion. Currently, you can make gifts up to $13,000 per recipient free from federal gift tax under the annual gift tax exclusion. If you are married, you and your spouse can combine your gift exclusions per recipient per year as long as you are both U.S. citizens and make the gift jointly. Even if one spouse owns all the assets, you can take advantage of gift splitting.
Caution: Gifts made and gift taxes paid within three years of your death will be included in your estate for federal estate tax purposes.

Equal, minority, and majority interests

Depending upon the percentage of ownership you share with other owners (if any), you may hold an equal, a minority, or a majority interest. If you have one co-owner and you each own half the business, you hold equal interests. If, however, you own 60 percent of the business and your co-owner owns the other 40 percent, you are the majority shareholder. Your ownership percentage can change over time through the gifting or sale of shares, and you could see your ownership position move from a majority to a minority position (or vice versa) depending on the number and actions of any co-owners.

Gifting a minority interest during lifetime

You may choose to make gifts of minority interests in your business. This would allow you to keep a majority of your ownership interest and the control that comes with it, and it would allow you to use a valuation discount for lifetime gifts of your interest that could reduce your gift tax liability. When you gift away a minority interest in your business, the IRS may allow you to discount the value of the stock (usually from 20 to 40 percent) for gift tax purposes. The discount compensates for the lack of marketability of minority shares in closely held businesses that would force a lower sale price.

Example(s): Your business interest is presently valued at $1.5 million. Your three children are all active in your business. You expect to remain active in your business for the rest of your life but would like to reduce the size of your estate. You begin a gifting program, and you and your spouse combine your gift tax exclusions and make gifts of $26,000 of your shares to each child. Your estate is immediately reduced by $78,000, free from federal gift tax (although you may still owe state gift tax). You continue with this gifting plan for 10 years (assume the annual gift tax exclusion does not change) and give away a total of $780,000 (today’s value, excludes growth) of your business interest. After the 10-year program, you still hold a majority of your interest, valued at $720,000 (today’s value, excludes growth).

Retaining a minority interest at death

You may choose to make larger gifts so that you are left holding a minority interest at your death. A minority interest held until your death might be eligible for a valuation discount that could significantly lower your estate tax on your business interest.

Example(s): Your business interest is presently valued at $1.5 million. Your three children are all active in your business. You expect to remain active in your business for the rest of your life but would like to reduce the size of your estate. You begin a gifting program, and you and your spouse combine your gift tax exclusions and make tax-free gifts of $26,000 of your shares to each child. Your estate is immediately reduced by $78,000, free from federal gift tax. In addition, you give each child an additional interest valued at $20,000, and you pay gift tax on the additional gifts of $60,000. You continue with this gifting plan for 10 years and give away a total of $1,380,000 of your business interest. Five years after you complete the gifting program, you die. At your death, the value of the interest in the business was $120,000, which is the amount included in your estate (before the calculation of any valuation discounts).

Conclusion

Lifetime gifting of your business interest offers a flexible and proactive approach to succession and estate planning. By gradually transferring ownership to heirs, you can reduce the value of your taxable estate, maximize the use of annual gift tax exclusions, and potentially benefit from valuation discounts that are unique to closely held businesses. This allows you to manage control, preserve family ownership, and secure your business’s long-term future—all while potentially lowering both gift and estate tax liabilities.

Whether you choose to gift minority interests over time or ultimately retain a discounted minority stake at your death, this strategy can provide significant advantages when executed with professional guidance. However, these decisions require careful planning, ongoing evaluation, and coordination with your estate, tax, and legal advisors. With the right strategy, lifetime gifting can be an essential tool for preserving both your business and your legacy for the next generation.

Scarlet Oak Financial Services can be reached at 800.871.1219 or contact us here.  Click here to sign up for our newsletter with the latest economic news.

Source:

Broadridge Investor Communication Solutions, Inc. prepared this material for use by Scarlet Oak Financial Services.

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances. Scarlet Oak Financial Services provide these materials for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.