New Podcast Episode: Fostering a More Innovative Workplace with Liz Hughes Watch or Listen Now

January 16, 2024

Transfer Minority Business Interests to Take Advantage of the Expanded Lifetime Estate and Gift Tax Exemptions Before 2026

The looming sunset of the expanded lifetime estate and gift tax exemption will arrive on January 1, 2026. If you are anticipating a transition of ownership of your business to your heirs in the years ahead, now may be the best time in a generation to take advantage of the increased thresholds before they expire. Gifting minority interests in the business over the next two years can help you maximize the potential tax benefit of the increased gifting thresholds. Considering the approaching sunset, this approach takes advantage of the current thresholds and shouldn’t be ignored.

Key Takeaways:

  • As of 2024, the lifetime estate and gift tax exemption stands at $13.61 million for an individual and $27.22 million for a married couple
  • At midnight on January 1, 2026, the current exemption will be cut in half and adjusted for inflation and it seems unlikely that Congress will vote to change this
  • By gifting minority interests in your business to the next generation over the next two years, owners can take advantage of higher valuation discounts while easing transitions of power and ownership

The 2017 Tax Cuts and Jobs Act (TCJA) nearly doubled the lifetime estate and gift tax exemption from $5.6 million for individuals and $11.18 million for couples, to $11.18 million for individuals and $22.36 million for couples, indexed for inflation after 2018. For 2024, the exemption stands at $13.61 million per person and $22.22 million for a married couple. As of January 1, 2026, the current lifetime estate and gift tax exemption will be cut in half and adjusted for inflation. Business owners may maximize their ability to take advantage of the increased lifetime exemption thresholds by transferring minority interests in their business.

Leveraging Valuation Discounts by Gifting Minority Interests

Transferring minority interests in a company can provide a significant advantage in terms of leveraging valuation discounts. Valuation discounts are applied based on the concept that a minority interest in a company is inherently less valuable than a controlling interest. This is because minority interest holders can’t influence strategic decisions or significantly impact the company’s operations. 

When business owners choose to transfer these minority interests as gifts to heirs, they can take advantage of these valuation discounts to significantly reduce their gift tax liabilities. By applying these discounts, the taxable value of the gifted interest is lowered, resulting in a lower amount of exemption used or lower gift tax that needs to be paid. This allows you to transfer more wealth to your chosen recipients without incurring substantial tax burdens.

It’s important to note that the application of valuation discounts in the transfer of minority interests should be done with careful consideration and in compliance with legal and tax regulations. Seeking professional advice from tax and estate planning advisors is crucial to navigate through complex tax laws and ensure that the gifting strategy aligns with individual circumstances and goals.

Enabling Smoother Transfers of Wealth Between Generations

Gifting minority interests can be an effective way to transfer wealth to the next generation while minimizing estate and gift taxes. By transferring minority interests, you can begin the process of transitioning ownership to your heirs without exceeding their lifetime exemption limit. This allows for a smoother transition of assets and can help reduce potential tax burdens for both the business owner and future generations.

Making a gift of minority interests to an heir can also provide opportunities for business continuity and succession planning. Involving family members in the company’s ownership structure through gifting minority interests can help ensure that the business remains in capable hands even after the owner’s passing or retirement. This promotes stability and longevity and fosters a sense of shared ownership and responsibility among the individuals involved.

Planning Now to Lock in More Favorable Tax Rates in the Future

When you gift minority interests, the future income and appreciation generated by those interests may be taxed at lower rates than if it remained within your estate, which can result in significant tax savings over time. From an income tax perspective, your heirs are likely in lower income tax brackets, so current and future income may be taxed at lower effective rates.

From an estate tax perspective, future appreciation of the minority interests is removed from your estate so no estate tax would be paid on the appreciation. This is why creating a strategy for the next two years is imperative: the approaching 2026 sunset will restore the much lower limits, closing an opportunity for many businesses to create significant tax savings while speeding up future transitions of power and ownership. 

Anders Forensics, Valuations and Litigation advisors routinely work with business owners to determine the value of business interests for gift tax purposes. Anders Family Wealth and Estate Planning advisors can help you devise a tax strategy around the lifetime estate and gift tax exemption before the 2026 changes. Learn more about the guidance our advisors can provide, along with the associated fees, by requesting a meeting with an Anders advisor below. 

All Insights

Keep up with Anders

Want to keep up with all the latest insights from Anders? Subscribe and receive the information that matters to you.