Most owners think about estate planning after the sale, when the money is in the bank and the pressure is off. By then, the most valuable move is usually gone. The cheapest time to move wealth to the next generation is while it’s still locked inside a private company that nobody has made an offer on. Every month you wait, the shares get closer to being worth exactly what a buyer pays for them.
Why before beats after
Value is lower before a deal exists. A minority stake in a private company, with no buyer, no market and no say over dividends, is worth less than the same shares the day a buyer agrees to pay cash for them. Appraisers apply discounts for lack of control and lack of marketability to reflect that. Those discounts are legitimate, and they are one of the most audited numbers in estate tax. The IRS publishes its own training guide for its valuation staff on exactly this question. After a signed deal, the discount argument mostly evaporates. The price is the price.
The growth leaves your estate. Whatever the shares are worth on the day you give them is what counts against your exemption. If the company sells for more later, that growth belongs to your children or their trusts, not to your taxable estate. You use exemption on today’s number and move tomorrow’s number.
The sunset panic is over. The reason to plan isn’t. For 2026 the federal exemption is $15 million per person, $30 million for a married couple. The 2025 tax law set it there with no scheduled sunset, indexed for inflation from 2027, instead of letting it fall by roughly half. That takes the deadline pressure off federal planning. It does nothing about New York, and it does nothing about a company that is about to double in value.
A fictional example
An owner’s company is appraised at $20 million today. No buyer, no banker, no letter of intent. The owner gives 30% of the company, as non-voting shares, to a trust for the children. Three years later the company sells for $30 million. The figures are illustrative; the discount is a placeholder for whatever a qualified appraiser actually supports.
| Amount | |
|---|---|
| 30% of the company, at the $20 million appraisal | $6,000,000 |
| Gift value after an illustrative 30% discount for non-voting, unmarketable shares | $4,200,000 |
| Exemption used | $4,200,000 |
| What the trust’s 30% is worth at the $30 million sale | $9,000,000 |
| Value that left the estate without using any more exemption | $4,800,000 |
| Federal estate tax that $4.8 million would have drawn at 40%, for an estate above the exemption | $1,920,000 |
Run the same gift the week before closing and there is no discount, no growth, and possibly an income tax problem on top. Same owner, same shares, same children. The only variable is the date.
New York is the real problem for Rochester families
New York’s estate tax works very differently from the federal one, and it catches families the federal system ignores.
| Federal | New York | |
|---|---|---|
| Exclusion per person (2026 deaths) | $15,000,000 | $7,350,000 |
| Top rate | 40% | 16% |
| Unused exclusion passes to a spouse | Yes (portability) | No |
| What happens just over the line | Tax applies only to the excess | The cliff: past 105% of the exclusion ($7,717,500), the whole estate is taxed |
| Gift tax | Yes, against the same exclusion | No gift tax, but gifts made within three years of death are added back (extended through 2031) |
The cliff, in dollars. An estate of exactly $7.35 million owes New York nothing. An estate of $7.8 million, just $450,000 more, owes roughly $746,000, because once you pass the cliff the tax is computed on everything from the first dollar. Being slightly over the line costs more than the overage itself. That is why some New York wills include a formula gift to charity sized to keep the estate under the cliff: giving away a little can save more than it costs.
A Rochester couple with $16 million can owe nothing federally and still leave New York about $2 million. With no planning, it lands when the second spouse dies, because New York doesn’t let the first spouse’s exclusion carry over. On a $16 million estate at the second death, New York’s table produces a bill of roughly $2 million. The standard fix is a trust created at the first death that holds up to New York’s exclusion and stays out of the survivor’s estate. Without it, the first spouse’s New York exclusion simply disappears. It is one of the first things we check in a Rochester couple’s plan.
Now read the gift-tax row again. New York doesn’t tax gifts, which makes lifetime giving one of the few clean ways to keep a New York estate under the cliff. But gifts made within three years of death get pulled back in. The family that waits until they’re 80 to start giving is gambling on the calendar. New York State estate tax
The timing trap that costs people millions
Tax law has a doctrine with a dull name and a sharp edge: assignment of income. If a sale is already practically certain when you give shares away, the IRS can tax you on the gain as if you sold them yourself and handed over the cash. The gift still happens. You just pay the income tax on money that went to someone else.
Three cases draw the line better than any rule of thumb.
| Case | When the gift happened | What the court did |
|---|---|---|
| Ferguson v. Commissioner (9th Cir. 1999) | After a tender offer had drawn enough shares to approve the merger | Taxed the donors on the gain. The sale was practically certain before the gifts were complete. |
| Rauenhorst v. Commissioner (Tax Court, 2002) | After a non-binding letter of intent, before a binding deal | Sided with the donors. The charities were not legally bound to sell, and the IRS was held to its own published ruling. |
| Estate of Hoensheid (Tax Court, 2023) | Two days before closing a $107 million sale | Taxed the owner on the gain, and denied the charitable deduction. |
Hoensheid is the one owners should study. He had told his attorney he didn’t want to transfer the stock “until we are 99% sure we are closing.” He got his wish. The court found the sale was already a practical certainty, taxed him on the gain from the gifted shares, and threw out his roughly $3.3 million deduction because the appraisal didn’t meet the rules. It had been prepared by the investment banker on the deal, who had no appraisal credentials. The court spared him penalties because he relied on professionals. Cold comfort: the tax was still owed.
| Stage of the deal | Risk that the gift is ignored for income tax |
|---|---|
| No buyer, no talks | Lowest. This is the clean window. |
| Talks, nothing signed | Low to moderate, depending on how far along things are. |
| Non-binding letter of intent signed | Gray zone. Rauenhorst helps, Hoensheid warns, and courts look at all the facts. |
| Purchase agreement signed | Generally too late. |
Courts look at emails, board minutes, the steps taken to get the company ready, and whether the deal could still realistically fall apart. There is no bright-line date. If you’re 99% sure, so is the IRS.
The tools, and how each one works
These are the structures estate attorneys draft. Here is how each one works, so the conversation with yours starts in the right place.
Annual exclusion gifts
In 2026 each person can give $19,000 per recipient, $38,000 from a married couple, without using any lifetime exemption. Small each year, meaningful over many.
Gifts to trusts
Shares go to a trust for your children or grandchildren instead of to them outright, with rules about how and when the money is used, and protection from divorce and creditors.
Spousal lifetime access trusts
One spouse gives to a trust that can benefit the other spouse, moving value out of the estate while keeping some access in the family. If the marriage ends, that access usually goes with it.
Grantor retained annuity trusts
Shares go in, the owner takes back fixed annual payments for a set term, and any growth above an IRS interest rate passes to the family free of gift tax. If the owner dies during the term, the plan mostly unwinds.
Sales to a grantor trust
Instead of a gift, shares are sold to a trust in exchange for a note, which freezes their value in the estate at today’s number. The growth goes to the trust.
Voting and non-voting shares
A recapitalization separates control from economics. The family receives value; the owner keeps the steering wheel.
The quiet superpower of a grantor trust. With many of these trusts, the owner keeps paying the income tax on the trust’s income, including its share of the sale gain. The IRS has ruled that paying that tax is not an additional gift. So every tax dollar the owner pays is another dollar that stays in the trust for the children, with no exemption used. Practitioners call it the tax burn, and for a large sale it can be worth more than the gift itself.
The trade-off nobody mentions: basis. Gifted shares carry your original tax basis. Shares you hold until death generally get a basis step-up, which wipes out the built-in gain. If the company is going to be sold during your life anyway, that step-up was never coming for those shares, so giving them up costs little. If the family might hold the company for decades, the math changes. The IRS confirmed in 2023 that assets in a grantor trust outside your estate do not get a step-up when you die.
The paperwork that protects the gift
A gift of private company stock lives or dies on two documents.
- A qualified appraisal, from an appraiser who meets the IRS’s qualifications, valuing the specific shares given on the date they were given.
- A gift tax return, Form 709, filed even when no tax is due. A gift reported with adequate disclosure starts a three-year clock for the IRS to challenge the value. A gift that isn’t adequately disclosed can be questioned years later, including after you’re gone.
Skimp on either and you have handed the IRS an open question with no deadline. The appraisal fee is small next to the number it defends.
How the planning usually unfolds before a sale
- It starts with what the household needs from the sale, because giving away money you’ll need later is the most expensive mistake. The sale-and-retire calculator shows the math.
- A qualified appraiser values the company, since every structure above depends on a defensible number.
- The estate attorney, CPA and planner work from the same numbers before anyone signs a letter of intent.
- The family conversation about who gets what, and why, usually comes before the documents are drafted.
- Records of every conversation with potential buyers matter, because the timeline is evidence.
Waiting until the buyer’s lawyers are drafting usually means fewer options, and the ones left cost more. The owners who get this right start two or three years out, when it feels too early. It isn’t.
How Morrowgate handles this. Greg starts with the sale-and-retire numbers, so nobody gives away money the household will need. Then he puts the estate attorney, the CPA and the appraiser on one timeline and one set of numbers, early, while the gift is still clean. The attorney drafts and the CPA files. Morrowgate makes sure the pieces happen in the right order, before a buyer makes the order for you.
Questions owners ask
Can shares still be given after a letter of intent is signed?
Sometimes. In Rauenhorst, the Tax Court respected gifts made after a non-binding letter of intent because the charities receiving them weren’t legally bound to sell. In Hoensheid, a gift two days before closing failed. The further the deal has moved, the more the facts look like a done deal, and the facts are what courts weigh.
Does New York have a gift tax?
No. But for deaths before 2032, taxable gifts made within three years of death are added back into the New York estate. Lifetime gifts work best for New Yorkers who make them early.
Does a gift tax return have to be filed if no tax is owed?
Generally yes, for gifts to anyone other than a U.S. citizen spouse that exceed the $19,000 annual exclusion. The return is how the gift uses exemption, and filing it with adequate disclosure is what starts the IRS’s three-year clock on the value.
What happens to the gift if the sale never closes?
The trust or the children still own the shares. A completed gift doesn’t depend on the deal, which is exactly why gifts made before any deal exists hold up best: they were never about the deal.
Where this guidance stops
This article is general education on gifting and estate planning before a business sale: how the rules and the options generally work. It is not tax, legal or investment advice, and nothing here is a recommendation for your situation. Rules change and outcomes turn on the facts, which is why a CPA and an attorney look at a family’s own numbers before anything is done.
Sources
- IRS: 2026 inflation adjustments, including the One, Big, Beautiful Bill amendments
- IRS: Estate and gift tax FAQs
- IRS: Discount for lack of marketability job aid for IRS valuation professionals
- New York State Department of Taxation and Finance: Estate tax
- Faegre Drinker: New York’s extended clawback for taxable gifts
- Estate of Hoensheid v. Commissioner, T.C. Memo. 2023-34
- IRS Revenue Ruling 2023-2 (basis of grantor trust assets)