Business Succession Planning: Tax Strategies for Transferring Ownership to Family or Buyers

By Yarik Yarosh, CPA ·September 5, 2026 ·6 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

Business succession planning is the process of transferring business ownership in the most tax-efficient manner possible. Without planning, a business transfer can trigger capital gains tax (on sale), gift tax (on lifetime transfers), or estate tax (on death). The federal estate and gift tax rate is 40% on amounts above the exemption ($13.99 million per person for 2025). For a business worth $5 million owned by a married couple, proper succession planning could save $0 to $2 million in taxes depending on the structure. The most common strategies involve a combination of lifetime gifting (using the annual exclusion and lifetime exemption), valuation discounts (reducing the taxable value of transferred interests by 20-40%), installment sales to grantor trusts (freezing the estate value while allowing growth to transfer tax-free), and buy-sell agreements (establishing a binding valuation and funding the transfer with life insurance).

✓Key takeaway

Business succession transfer methods:

Method	Tax Triggered	Best For
Outright sale to third party	Capital gains tax (seller)	Exit with full cash proceeds
Installment sale to family	Capital gains tax (spread over time)	Gradual transition, seller retains income stream
Gift (lifetime transfer)	Gift tax (above exemption)	Transferring to next generation, leveraging exemption
Bequest (transfer at death)	Estate tax (above exemption)	Stepped-up basis for heirs
Sale to IDGT (intentionally defective grantor trust)	No income tax (grantor trust), no gift tax (sold at FMV)	High-growth businesses, estate freeze
GRAT (grantor retained annuity trust)	No gift tax if zeroed-out	Transferring appreciation tax-free
ESOP (employee stock ownership plan)	Deductible contributions, IRC 1042 deferral	Transferring to employees, C-Corp

2025 transfer tax numbers:

Item	Amount
Estate/gift tax exemption	$13.99 million per person
Combined MFJ exemption	$27.98 million
Annual gift exclusion	$19,000 per recipient
Estate/gift tax rate (above exemption)	40%
Generation-skipping transfer (GST) tax exemption	$13.99 million
GST tax rate	40%

Valuation discounts (commonly applied):

Discount Type	Typical Range	Applies When
Minority interest (lack of control)	15-30%	Transferring less than 50% of voting interest
Lack of marketability	15-35%	Closely held business (no public market)
Combined discount	25-45%	Both discounts applied together

How do the major succession strategies compare?

Hypothetical example

Round numbers. A married couple. Ages 60 and 58. Own 100% of an S-Corp worth $6 million. Two adult children. Want to transfer ownership over the next 10 years.

Strategy 1: Annual exclusion gifting Each parent can gift $19,000/year to each child (and each child’s spouse):

Recipients	Gifts per Year (from both parents)
Child 1	$19,000 x 2 parents = $38,000
Child 1’s spouse	$19,000 x 2 = $38,000
Child 2	$19,000 x 2 = $38,000
Child 2’s spouse	$19,000 x 2 = $38,000
Total annual gifts	$152,000

Over 10 years: $1,520,000 transferred tax-free (no gift tax, no use of lifetime exemption).

With a 30% valuation discount (minority interest + lack of marketability), the parents can actually transfer $2,171,000 in FMV of stock while only using $1,520,000 of gift exclusions:

Item	Without Discount	With 30% Discount
Annual gift per recipient	$19,000	$19,000 / 0.70 = $27,143 in FMV
Total 10-year transfer (FMV)	$1,520,000	$2,171,000

Strategy 2: Installment sale to an IDGT The parents sell the remaining $3,829,000 in stock (after gifting) to an intentionally defective grantor trust (IDGT) in exchange for an installment note.

Item	Details
Sale price	$3,829,000 (discounted by 30% = $2,680,000 for transfer tax purposes)
Installment note	9-year note, IRS AFR rate (~5%)
Annual payment to parents	~$382,000/year (principal + interest)
Income tax on sale	$0 (sale to grantor trust is ignored for income tax)
Gift tax	$0 (sold at FMV, no gift element)
Estate tax	$0 (stock removed from estate)

How the IDGT works:

Parents establish the trust with a 10% “seed gift” ($268,000, using lifetime exemption)
Trust buys remaining stock for $2,680,000 installment note
Because the trust is a “grantor trust” (defective for income tax), the sale isn’t a taxable event
Trust income pays the installment note
All growth ABOVE the AFR interest rate passes to children tax-free
At parents’ death, the stock is OUTSIDE the estate

If the business grows 8% per year:

Year	Business FMV	Stock in Trust (FMV)	Stock in Estate
Year 0	$6,000,000	$3,829,000	$2,171,000 (gifted) already out
Year 5	$8,816,000	$5,628,000	Out of estate
Year 10	$12,953,000	$8,271,000	Out of estate

The parents froze the transfer value at $2,680,000 (discounted). All appreciation ($5,591,000 in growth over 10 years) passes to children with zero transfer tax.

Strategy 3: Do nothing (transfer at death)

Item	Amount
Business FMV at death (assume Year 10, 8% growth)	$12,953,000
Estate tax exemption (MFJ)	$27,980,000
Taxable estate	$0 (under exemption)
Estate tax	$0
Heirs’ basis	$12,953,000 (stepped-up basis)

If the couple’s total estate (including the business) stays under the $27.98 million combined exemption, there’s no estate tax and the heirs get a stepped-up basis, eliminating all capital gains on the appreciation.

When succession planning is essential (estate over exemption): If the couple’s total estate (business + real estate + investments + retirement accounts) exceeds $27.98 million, the 40% estate tax on the excess makes proactive planning critical.

Total Estate at Death	Estate Tax (No Planning)	Estate Tax (After IDGT + Gifting)
$20,000,000	$0 (under exemption)	$0
$30,000,000	$808,000	$0 (business removed from estate)
$40,000,000	$4,808,000	Significantly reduced
$50,000,000	$8,808,000	Significantly reduced

OBBBA note: The OBBBA made the increased exemption ($13.99M) permanent beyond 2025, reducing urgency for many families. However, the exemption could be changed by future legislation, and planning strategies take years to implement fully.

Illustrative numbers only, not a real client and not advice for your facts.

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Cite this page

Yarik Yarosh, CPA. "Business Succession Planning: Tax Strategies for Transferring Ownership to Family or Buyers." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-business-succession-planning-tax-strategies

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.