Estate and Gift Tax Planning for Business Owners: Succession Strategies, Valuation Discounts, and the Lifetime Exemption

By Yarik Yarosh, CPA ·September 5, 2026 ·9 min read

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

Estate and gift tax planning is the area where procrastination is most expensive. Under IRC 2001, the federal estate tax imposes a 40% tax on the value of an estate exceeding the lifetime exemption ($13.99 million per individual in 2025, $27.98 million for married couples using portability). For a business owner whose company is worth $20 million, failing to plan means the estate could owe more than $2 million in federal estate taxes, and the heirs may need to sell the business to pay the tax bill. The 40% rate is on the gross value of the business included in the estate, reduced by valuation discounts and other deductions. Business owners who begin transferring ownership during their lifetime, using annual gift tax exclusions, valuation discounts, and trust structures, can move millions of dollars of business value to the next generation at a fraction of the gift tax cost. The critical concept is that a gift made today freezes the value: if a business owner gives away a $1 million interest today and the business grows to $5 million by the time the owner dies, the $4 million of appreciation is never included in the owner’s estate.

✓Key takeaway

Estate and gift tax thresholds (2025):

Item	Amount
Lifetime gift and estate tax exemption	$13.99 million (individual) / $27.98 million (married couple)
Annual gift tax exclusion	$19,000 per recipient ($38,000 for married couples splitting gifts)
Estate and gift tax rate (above exemption)	40%
Generation-skipping transfer (GST) tax exemption	$13.99 million (same as estate tax exemption)
GST tax rate	40% (on top of estate/gift tax if applicable)
Portability	Surviving spouse can use deceased spouse’s unused exemption (DSUE)

Key estate planning strategies for business owners:

Strategy	How It Works	Tax Benefit
Valuation discounts (DLOM/DLOC)	Minority interests in closely-held businesses are discounted for lack of marketability and lack of control	20-35% reduction in taxable value
Annual gifting	Gift up to $19,000/recipient/year ($38,000 if married) without using lifetime exemption	Removes future appreciation from estate
GRATs (Grantor Retained Annuity Trusts)	Transfer appreciation above the 7520 rate to heirs with minimal or zero gift tax	”Zeroed-out” GRATs have no gift tax cost
IDGTs (Installment Sale to Intentionally Defective Grantor Trust)	Sell business interest to a grantor trust for a note; all appreciation passes to trust beneficiaries	Freeze technique; no capital gains on the sale (grantor trust)
FLPs/FLLCs (Family Limited Partnerships)	Transfer business interests to a partnership; apply valuation discounts to gifts of limited partnership interests	Discounted transfers + centralized management
Buy-sell agreement (life insurance funded)	Agreement among co-owners to buy the deceased owner’s interest; life insurance provides liquidity	Estate inclusion at the agreed price; tax-free death benefit
IRC 6166 installment payment	Spread estate tax on a qualifying closely-held business over 14 years	Only 2% interest on the first $1.86M of deferred tax

How do business owners reduce estate taxes?

Hypothetical example

Round numbers. For current guidance, see IRS gift tax FAQ. A business owner (age 60) owns 100% of an S-Corp worth $10,000,000 (fair market value). The owner is married with two adult children and four grandchildren. The owner hasn’t used any of the $13.99 million lifetime exemption.

Without any estate planning (die owning 100%):

Item	Amount
Gross estate (100% of S-Corp)	$10,000,000
Other assets (home, investments)	$4,000,000
Total gross estate	$14,000,000
Lifetime exemption	($13,990,000)
Taxable estate	$10,000
Estate tax (40%)	$4,000

In this case, the estate tax is minimal because the estate is near the exemption. But if the business grows to $20,000,000 by the time the owner dies (age 80):

Item	Amount
Gross estate (S-Corp)	$20,000,000
Other assets	$6,000,000
Total gross estate	$26,000,000
Lifetime exemption (estimated future amount, assume $15,000,000)	($15,000,000)
Taxable estate	$11,000,000
Estate tax (40%)	$4,400,000

Strategy 1: Annual gifting with valuation discounts

The owner creates a family LLC, transfers the S-Corp stock to the LLC, and gifts minority LLC interests to the children and grandchildren each year.

Item	Details
25% interest in LLC (FMV)	$2,500,000
Discount for lack of marketability (20%)	($500,000)
Discount for lack of control (15%)	($300,000)
Discounted value of 25% interest	$1,700,000

Annual gifting program:

Year	Gift per Child/Grandchild (discounted value)	Lifetime Exemption Used	Recipients
Year 1	$38,000 x 6 = $228,000 (excluded from exemption by annual exclusion)	$0	2 children + 4 grandchildren
Additional Year 1 gift (using exemption)	$500,000 total	$500,000	Trusts for children
Year 2	$38,000 x 6 + $500,000	$500,000	Same
Years 3-10	Same pattern	$500,000/year	Same

After 10 years:

Item	Amount
Total value transferred (discounted)	$7,280,000
Actual FMV transferred (before discounts)	~$10,400,000
Lifetime exemption used	$5,000,000
Remaining exemption	$8,990,000
Value removed from estate (including growth)	$15,000,000+ (if business appreciates)
Estate tax savings (40% x $15,000,000 removed)	$6,000,000

Strategy 2: Zeroed-out GRAT

The owner transfers $5,000,000 of S-Corp stock to a 2-year GRAT. The GRAT pays back an annuity equal to the original value plus the IRC 7520 interest rate (approximately 5.2% in 2025). Any appreciation above the 7520 rate passes to the children tax-free.

Item	Amount
Value transferred to GRAT	$5,000,000
Annuity payment (Year 1)	$2,632,000
Annuity payment (Year 2)	$2,632,000
Total annuity payments	$5,264,000
Gift tax value of GRAT remainder (zeroed out)	~$0
S-Corp appreciation during GRAT term (assume 15%/year)	$1,612,500
Amount passing to children (tax-free)	$1,612,500
Estate tax savings (40%)	$645,000

If the GRAT is repeated (“rolling GRATs”) every 2 years:

GRAT Series	Appreciation Transferred (Tax-Free)
GRAT 1 (Years 1-2)	$1,612,500
GRAT 2 (Years 3-4)	$1,854,375
GRAT 3 (Years 5-6)	$2,132,531
GRAT 4 (Years 7-8)	$2,452,411
GRAT 5 (Years 9-10)	$2,820,273
Total appreciation transferred	$10,872,090
Estate tax saved	$4,348,836

Strategy 3: Buy-sell agreement with life insurance

Item	Details
Business value (at death)	$20,000,000
Buy-sell price (fixed or formula-based)	$20,000,000
Life insurance death benefit	$20,000,000 (owned by an ILIT to exclude from estate)
Annual premium	$40,000-$80,000 (term life, age 60, healthy)

When the owner dies:

Step	Details
1	ILIT receives $20,000,000 death benefit (tax-free, excluded from estate)
2	ILIT purchases the business from the estate at the buy-sell price
3	Estate receives $20,000,000 in cash (liquid, can pay estate taxes)
4	Children/trust own the business through the ILIT

Without life insurance, the heirs may need to sell the business to pay $4,400,000 in estate taxes.

IRC 6166: Installment payment of estate tax For qualifying closely-held businesses (the business must represent more than 35% of the adjusted gross estate):

Feature	Details
Deferral period	5 years of interest-only payments, then 10 annual installments of tax + interest
Interest rate (2% portion)	2% on the tax attributable to the first $1.86 million of taxable value (2025)
Interest rate (remaining)	45% of the annual underpayment rate
Qualification	Closely-held business must be > 35% of adjusted gross estate
Risk	IRS can accelerate the tax if the business is sold or distributions exceed 50% of income

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

What are the tax differences between a cross-purchase and entity redemption buy-sell agreement?

In a cross-purchase agreement, the remaining owners buy the departing owner’s interest directly, and each buyer gets a stepped-up basis in the purchased interest equal to what they paid. In an entity redemption, the business itself buys back the departing owner’s interest, which means the remaining owners don’t get a basis step-up (their percentage ownership increases but their basis stays the same). Cross-purchase agreements funded with life insurance can become unwieldy when there are many owners (each owner needs a separate policy on every other owner). Entity redemptions are simpler administratively but can trigger the accumulated earnings tax if the corporation retains excess funds for the anticipated buyout. For S-Corps, redemptions that don’t completely terminate a shareholder’s interest are treated as distributions (potentially taxable as dividends from accumulated E&P), not as sales, which can produce unfavorable tax results.

Should I use a revocable or irrevocable trust for estate planning?

A revocable living trust avoids probate and provides management continuity if you become incapacitated, but offers no tax benefits because the assets are still in your taxable estate. An irrevocable trust removes assets from your estate, potentially reducing estate tax, and can protect assets from creditors. The trade-off is control: you cannot easily modify or revoke an irrevocable trust. For most small business owners below the estate tax exemption ($13.61 million in 2024), a revocable trust paired with proper beneficiary designations is sufficient. Business owners above the exemption (or expecting to exceed it before the 2026 sunset) should consider irrevocable structures like GRATs, SLATs, or intentionally defective grantor trusts.

Related guides:

Estate Tax Planning for Business Owners: Exemption, Valuation Discounts, and the 2026 Sunset

How does the lifetime gift and estate tax exemption work for business owners?

The combined lifetime gift and estate tax exemption for 2025 is $13.99 million per individual ($27.98 million for married couples), meaning you can transfer this amount during life or at death without owing federal gift or estate tax. Gifts to individuals up to the annual exclusion ($19,000 per recipient for 2025) don’t count against your lifetime exemption and don’t require a gift tax return. The current elevated exemption is set to sunset after 2025 under the Tax Cuts and Jobs Act, potentially dropping to approximately $7 million (indexed for inflation), which creates urgency for business owners to lock in transfers at today’s higher levels. Transferring discounted interests in a family business entity (LLC or FLP) can leverage the exemption because valuation discounts for lack of marketability and lack of control can reduce the taxable value of the transferred interest by 25-40%.

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Cite this page

Yarik Yarosh, CPA. "Estate and Gift Tax Planning for Business Owners: Succession Strategies, Valuation Discounts, and the Lifetime Exemption." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-estate-gift-tax-planning-business-owners-succession

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