Business Succession Planning: Tax Implications of Transferring a Business to Family or Partners

By Yarik Yarosh, CPA ·September 5, 2026 ·3 min read

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

Transferring a business to the next generation or to partners is one of the most tax-sensitive transactions a business owner will face. The transfer method, timing, and structure can mean the difference between a smooth transition and a tax liability that forces the sale of business assets to pay the IRS.

✓Key takeaway

Primary transfer methods and tax consequences:

Outright gift: The FMV of the business interest is a taxable gift. Annual exclusion: $18,000 per recipient (2024). Lifetime exclusion: $13.61 million (2024). Gift tax rate: 40% on amounts exceeding the lifetime exclusion. The recipient takes a carryover basis (the donor’s basis), so capital gains tax is deferred until the recipient sells.
Sale to family/partners (fair market value): The seller recognizes capital gain (LTCG if held > 1 year). The buyer gets a stepped-up basis equal to the purchase price. An installment sale under IRC 453 spreads the gain over the payment period.
Sale below fair market value: The difference between FMV and sale price is a gift. The seller recognizes gain on the sale price minus basis. The buyer’s basis is the FMV (not the sale price).
Transfer at death (estate): The business is included in the estate at FMV. Estate tax applies if the total estate exceeds the exemption ($13.61 million in 2024, scheduled to drop to approximately $7 million in 2026 under current law unless extended). The heir receives a stepped-up basis to FMV at the date of death, eliminating all unrealized capital gains.
Buy-sell agreement (cross-purchase or entity redemption): Partners or the business entity agree to purchase a departing owner’s interest at a predetermined price or formula. Funded by life insurance (death trigger), disability insurance, or installment payments (retirement/departure trigger).

How does a buy-sell agreement work?

Hypothetical example

Round numbers. Two equal partners own a business worth $2,000,000. Each partner’s interest is worth $1,000,000.

Cross-purchase buy-sell (funded by life insurance):

Each partner owns a life insurance policy on the other partner for $1,000,000
Annual premium: approximately $3,000-$5,000 each (depending on age and health)
Premiums are NOT tax-deductible (life insurance premiums are personal expenses)
Death benefit is TAX-FREE to the surviving partner under IRC 101(a)

When Partner A dies:

Partner B receives $1,000,000 life insurance death benefit (tax-free)
Partner B uses the $1,000,000 to buy Partner A’s interest from A’s estate
Partner B’s basis in the purchased interest: $1,000,000 (the purchase price)
Partner A’s estate receives $1,000,000 cash (included in the estate, but offset by the sale)
Partner A’s heirs receive $1,000,000 (subject to estate tax if above the exemption)

Without a buy-sell agreement:

Partner A’s heirs inherit a 50% interest in the business
The surviving partner is now in business with the heirs (who may have no interest in or knowledge of the business)
Disputes over management, distributions, and valuation are common
The business may need to be sold or liquidated to satisfy the estate

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

What about the IRC 6166 deferral?

Under IRC 6166, if a closely held business represents more than 35% of an estate’s adjusted gross estate, the estate can defer federal estate tax attributable to the business for up to 5 years (interest-only payments), then pay in installments over 10 years. This provides up to 14 years of deferral for estates with illiquid business interests.

The interest rate on the deferred tax is 2% on the first approximately $1.8 million of deferred tax (in 2024), which is significantly below market interest rates. This makes IRC 6166 one of the most favorable financing options available for estate tax on a closely held business.

Related guides:

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Cite this page

Yarik Yarosh, CPA. "Business Succession Planning: Tax Implications of Transferring a Business to Family or Partners." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-succession-planning-taxes

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