Now’s the Time to Gift Private Business Interests

The United States is home to more than 650,000 private businesses,ⁱ and the owners of many of those businesses currently have an incredible window of opportunity. With lower price multiples, valuation discounts, and an elevated gift and estate tax exclusion, today’s favorable planning backdrop is ideal for those likely to owe estate tax someday. But this window may soon be closing—to take advantage, owners should act now to give business interests to trusts set up for their family.

Price Multiples Appear Primed

To truly understand today’s favorable environment, we’ll start with what’s happened to the values of private businesses of late. Thanks to surging interest rates, US private equity middle-market deal activity in 2023 was well off the frenetic pace of 2021. Both the number of transactions and total deal value plunged over 30%, accompanied by a 25% decline in Price/EBITDA multiples.ⁱⁱ Now, with interest rate cuts teed up through the fall and into 2025, private markets seem poised for strong performance in the years ahead. And that leaves business owners with a critical decision to make: should they gift shares to family members before they rebound?

Valuation Discounts Add Fuel to the Fire

There’s another factor in the mix. When valuing a business, the whole is often worth more than the sum of its parts. An appraiser typically accounts for this by applying valuation discounts to a minority interest in a private business to reflect a lack of control and marketability. In fact, a minority shareholder’s stake is often marked down by 10%–40%. This valuation discount is very beneficial from a wealth transfer standpoint because it allows the business owner to make larger gifts while using less of their available lifetime gift exclusion.

Riding into the Sunset

Current estate tax law provides another strong incentive for business owners to transfer shares. Each individual can transfer up to $13.61 million during their lifetime or at death before incurring federal gift or estate tax. A married couple can utilize their combined federal exclusion to transfer up to $27.22 million tax-free. However, this provision sunsets after 2025, and the exclusion will be cut in half unless Congress passes new legislation. After adjusting for inflation, we project the exclusion would fall to $7.2 million per person. For business owners who wish to give more with the elevated exclusion, there is urgency to “use or lose it” before 2026.

Give Now or Pay Later?

The trifecta of lower business values, minority discounts, and the high exclusion has created an extraordinary opportunity for business owners to make a lifetime gift. To quantify the immediate benefits, we compared the outcomes of various combinations of these factors (Display 1). For instance, transferring $13.61 million with no discount before the exclusion drops would immediately generate $2.6 million of potential estate tax savings. But what if the gift is made with business interests eligible for a 30% valuation discount? Even a discounted gift of $7.2 million made after sunset would transfer $10.3 million of assets, generating $1.2 million of estate tax savings. But if a discounted gift were made today—and then the business was sold, with the assets no longer subject to a valuation discount—the benefit increases to $4.9 million.

The Advantage of Lifetime Gifts

A distinct advantage of giving during one’s lifetime is that once an asset is transferred outside the estate, all the future growth and income generated by that asset will avoid estate tax at the donor’s death. Put simply, whether a private business interest subsequently doubles, triples, or increases 100-fold, none of the appreciation will be subject to estate tax after the date of the gift. That’s one reason why private business interests with high upside potential can be amazing assets for wealth transfer.

To supercharge the effectiveness of the gift, a business owner can transfer shares into an irrevocable grantor trust. With this type of trust, the business owner (as grantor) retains the responsibility to pay any income and capital gains taxes incurred in the trust. By doing so, the trust can grow without the tax burden, and save even more estate taxes down the road.

Display 2 shows the potential estate tax savings if the gift of the $13.61 million business interest were to grow at 7% per year for 20 years. With an undiscounted gift today, the value outside the estate would grow to $52.7 million, saving $16.4 million in future estate taxes. Applying a 30% valuation discount, the value of the $19.4 million of assets transferred would reach over $75 million. Even if the business interest was held and subject to the same discount in 20 years, that would save $14.2 million in estate taxes. And if the assets were sold or substituted for assets not subject to a discount, the estate tax savings would exceed $25 million!

Sizing the Gift

How much is too much to transfer? Job number one is to ensure business owners retain sufficient assets to secure their spending needs. Before transferring any shares, a business owner should work with their financial advisor to determine their core capital. This is the amount needed to sustain spending through challenging markets, high inflation, and excess longevity. If the gift is made to a grantor trust, they should also factor in future taxes. Surplus capital beyond the business owner’s required core capital and tax reserves can be considered for wealth transfer. If the business owner is married and wants to keep an indirect string attached to the assets, they could create a trust that benefits both their children and spouse, known as a Spousal Lifetime Access Trust, or SLAT.

Now Is the Time to Act!

Lower values, discounts, and the high exclusion have created a remarkable opportunity for business owners to make lifetime gifts. Though current law offers less than 16 months to take advantage of the elevated exclusion, the time to act may be much shorter. Estate planning attorneys and valuation professionals are expected to be very busy as the sunset approaches and may run out of capacity before long. Don’t delay.