The best estate planning window a business owner ever gets closes when a letter of intent is signed. Before a buyer puts a hard number on the company, interests in it are valued by appraisal, often at meaningful discounts, and future appreciation can be moved outside the taxable estate at that lower value. Afterward, transfers are measured against the deal price and most of the advantage is gone.
This article is educational only. It is not tax, legal, estate, or investment advice, nothing in it is a recommendation to adopt any strategy, and every technique mentioned carries strict requirements, real costs, and ways to fail. Dollar figures reflect federal law as of 2026 and come from the IRS and professional sources listed at the end. Any of these techniques calls for a qualified estate planning attorney and CPA to work through the specific facts first.
Why a pre-LOI valuation creates the window
A private company has no ticker. For gift and estate tax purposes its value is whatever a qualified appraiser can defend, and before a sale process begins that appraisal rests on earnings, comparable transactions, and the character of the specific interest being transferred. A minority stake with no control over distributions and no ready market is worth less per share than the company as a whole, and appraisers apply documented discounts to reflect that.
One law firm client alert illustrates the arithmetic. A minority interest representing $7.5 million of pro rata company value was appraised at roughly $5.4 million after a discount for lack of marketability and a further discount for lack of control, applied one after the other rather than added together. A gift at the appraised value consumes far less of the owner's lifetime exclusion than the same interest would after a buyer prices the business.
What changes at the letter of intent
Once an LOI or purchase agreement exists, an appraiser can no longer look past the deal price. Discounts shrink or vanish because the interest now has a known exit at a known number, and the IRS has that same number to test any transfer against. Courts have also long applied assignment-of-income principles to tax the original owner on gain from interests given away when a sale was already a practical certainty, which can undo the entire purpose of a late transfer. The client alert cited above puts the timing bluntly: do the estate planning well in advance of the sale, even before a term sheet is prepared.
The federal numbers that frame the conversation
As of 2026, federal law provides a basic exclusion of $15,000,000 per person for combined lifetime gifts and transfers at death, per the IRS inflation-adjustment release for the year. A married couple has two exclusions. Separately, the annual gift exclusion for 2026 is $19,000 per recipient, and the IRS defines a gift broadly as any transfer where full consideration is not received in return.
Gifts beyond the annual exclusion are reported on Form 709, and IRS guidance lists copies of appraisals and transfer documents among the attachments that support hard-to-value gifts. That paperwork is one reason lead time matters. A defensible appraisal of a private company takes weeks to produce and must exist before the transfer it supports; a rushed valuation invites exactly the scrutiny a careful one avoids.
The planning logic itself is plain arithmetic. An interest moved out of the estate at a $5 million appraised value shelters all of its later appreciation, including the jump a sale itself creates. If the company sells two years later and that same interest fetches $12 million, the $7 million difference passed outside the estate without using any additional exclusion. Those numbers are illustrative only, and whether any of this fits a particular family is a question for counsel.
Trust concepts owners commonly hear about
Two grantor trust structures come up in nearly every pre-sale estate planning conversation. They are described here conceptually so an owner can follow the discussion with counsel. Neither description is a recommendation, and both involve irrevocable transfers with real failure modes.
Grantor retained annuity trusts (GRATs)
An owner transfers an interest to an irrevocable trust and retains a fixed annuity for a term of years. The annuity payments flow back to the owner over the term. As one law firm alert describes the structure, future appreciation accumulates in the GRAT and outside the business owner's estate, while the original asset value flows back to the owner through the annuity. A sale during the term can produce exactly the appreciation the structure is designed to capture, which is why GRATs tend to surface early in exit conversations rather than late.
Sales to intentionally defective grantor trusts (IDGTs)
Here the owner sells the interest to an irrevocable trust rather than gifting it outright. As a national accounting firm's technical explainer describes the sequence, the trust is first funded with a seed gift, often suggested at 10% or more of the asset value, then purchases the interest in exchange for a promissory note equal to fair market value, carrying interest at or above the applicable federal rate set by the IRS. Because the trust is not treated as separate from its creator for income tax purposes, the sale is generally disregarded and the note interest is not taxable income to the owner. The estate holds a note frozen at today's value while appreciation accrues in the trust. The same explainer flags the catch: any note balance still unpaid at death is included in the estate.
| Question counsel will address | GRAT | Sale to an IDGT |
|---|---|---|
| How the interest moves | Gift to the trust, with a retained annuity | Sale to the trust for a promissory note |
| What flows back to the owner | Fixed annuity payments for a set term | Note payments of principal and interest |
| What can grow outside the estate | Appreciation above the rate assumed at funding | Appreciation above the note's interest rate |
| Issues to probe with counsel | Effect of death during the annuity term; term length | Seed gift size; note balance remaining at death |
State estate and inheritance taxes
The federal exclusion is only half the map. Per the Tax Foundation's 2025 survey, twelve states and the District of Columbia levy their own estate taxes and five states levy inheritance taxes, with Maryland imposing both. Exemptions sit far below the federal level in most of them: Oregon's starts at $1 million and Rhode Island's near $1.8 million, while Connecticut's tracked the federal amount. Top rates reach 16% in several states, and Washington's rises to 35% on the largest estates after a 2025 increase.
The practical point for a seller is that an estate comfortably under the federal line can still face a meaningful state tax, and sale proceeds are precisely the kind of asset that pushes a family over a $1 million or $2 million state threshold. Owners weighing a move between states before or after a sale face domicile and timing questions of their own. All of it belongs with counsel who knows the owner's home state.
Why this runs through qualified counsel, early
Everything above is deliberately high level, because none of it is self-serve. Each structure involves irrevocable transfers, appraisal support, gift tax filings, and trustee selection, plus interactions with the eventual purchase agreement: buyers will ask who owns the shares, whether trusts are bound by the shareholder documents, and who has authority to sign. The work divides among professionals who each carry a piece of it:
- Estate planning attorney: designs and drafts the trusts, sizes transfers against the exclusion, and handles state-law questions.
- CPA: models the income tax consequences, including how grantor trust status shows up on the owner's own returns, and prepares Form 709 filings with the required attachments.
- Independent appraiser: produces the valuation the whole plan rests on.
- Wealth advisor: checks that whatever stays outside the trusts still supports the family's spending and liquidity needs.
The common failure is sequencing. The owner hires the deal team first and calls the estate attorney at LOI, after the window has closed. Reversing that order costs a few meetings held a year or two early. Platforms such as Bankerly.ai run the transaction itself, from valuation through diligence, while the estate work stays where it has always belonged: with the owner's own attorney, CPA, and appraiser, started well before any buyer is in the picture.
Sources
- IRS: Tax inflation adjustments for tax year 2026 (IR-2025-103)
- IRS: Frequently asked questions on gift taxes
- Tax Foundation: Estate and inheritance taxes by state
- RSM US: Sales to intentionally defective grantor trusts explained
- Davis+Gilbert: Estate planning issues to consider before selling your business
Frequently asked questions
- Why should I do estate planning before selling my business?
- Before a buyer sets a price, interests in a private company are valued by appraisal, often with discounts for lack of control and marketability, so transfers use less of the lifetime exclusion and future appreciation can grow outside the estate. Once a letter of intent fixes the value, those advantages largely disappear. Whether and how to act is a question for a qualified estate planning attorney.
- What is a GRAT and how does it work?
- A grantor retained annuity trust is an irrevocable trust into which an owner transfers assets while keeping a fixed annuity for a term of years. The annuity flows back to the owner, and growth above the rate assumed when the trust is funded accumulates in the trust outside the taxable estate. Whether one fits a given sale depends on facts only counsel can weigh.
- What is an intentionally defective grantor trust (IDGT)?
- An IDGT is an irrevocable trust that is not treated as separate from its creator for income tax purposes but is designed to keep assets outside the taxable estate. In pre-sale planning, owners sometimes sell interests to one in exchange for a promissory note, freezing today's value in the estate while appreciation accrues in the trust. Seed gifts, note terms, and risks require qualified counsel.
- Can I gift shares of my business to my children before selling it?
- Generally yes, subject to gift tax rules. As of 2026, the annual exclusion covers $19,000 per recipient, and larger gifts draw on the $15 million lifetime exclusion and are reported on Form 709, usually with an appraisal attached. Gifts made after a deal is effectively certain can be challenged, so timing, documentation, and structure belong with your own attorney and CPA.
- Which states have an estate or inheritance tax?
- Per the Tax Foundation's 2025 survey, twelve states and the District of Columbia levy estate taxes, including New York, Illinois, Massachusetts, Washington, and Oregon, and five states levy inheritance taxes; Maryland has both. Exemptions start as low as $1 million in Oregon, far below the federal $15 million exclusion, so sellers in those states face a second layer of planning.
Considering a sale in the next few years? See what a prepared process looks like.
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