How to Make Leveraged Use of Your Federal Lifetime Estate and Gift Tax Exemption

As January 1, 2026, creeps closer and the “sunset” of the increased federal lifetime estate and gift tax exemption is less than two years away, many clients are seeking ways to use the increased federal exemptions for estate and gift tax purposes (the “Lifetime Exemption”). While the Lifetime Exemption is currently $13.61 million per person, it is expected to be reduced automatically as of January 1, 2026, to approximately $7.5 million per person.

Identifying Opportunities

One excellent gifting opportunity for clients who own an interest in a closely held entity is to gift a minority, non-controlling interest in the entity to individuals or trusts for individuals. For valuation purposes, minority interests in closely held entities are often discounted for lack of marketability and lack of control.

These discounts can result in the transfer of the minority interest to recipients based on a reduced value for gift tax purposes. In other words, the discounted value of the interest can use less of your Lifetime Exemption for gift tax purposes than the interest would be worth otherwise. Ultimately, this discounting can save significant estate taxes later on for your family and intended heirs.

Illustrating Savings from Discounted Gifts

For example: A business owner (“Client”), a Maryland resident, currently owns a 100% interest in an operating business, through her limited liability company (“LLC”). The value of Client’s taxable estate, including the LLC, real property, and other investments, is projected to be $40 million. The LLC is currently valued at $30 million.

Currently, Client’s estate plan provides that, at her death, her estate (after the payment of significant federal and Maryland estate taxes), including the LLC, will be divided into three equal shares, and be distributed to separate trusts held for the benefit of her three sons and their respective descendants. Client has not used any of her $13.61 million Lifetime Exemption.

Client gifts, in 2024, 48% of her interest in the LLC to the Trustees (whom she chooses) of three inter vivos trusts for her sons and their descendants, retaining a 52% interest in the LLC. Although one may assume a 48% interest in a $30 million business will have a value for gift tax purposes of $14.4 million and thus, will use $14.4 million of Client’s lifetime gift tax exemption, Client has engaged a certified valuation appraiser who has applied discounts to the value of the LLC for lack of marketability and lack of control. Assuming that all discounts amount to around 30%, the value of the gift of the 48% interest in the LLC would be just over $10 million for gift tax

Ten years later, assume that Client is still living, and the LLC has doubled in value before being sold for $60 million. At that time, the three trusts will gross $28.8 million of value when their interest is liquidated, at a gift tax “cost” of around $10 million. Effectively, Client has shifted appreciation of around $18.8 million to the three trusts out of her taxable estate. This shift represents an estate tax savings of approximately $9 million (federal and Maryland), to the benefit of Client’s sons and grandchildren.

Income Taxes and Other Considerations

In the example above, if Client chose to structure the trusts for her sons as Grantor trusts, Client would continue to pay the income taxes based on 100% of the LLC income for the 10 years between the date of the gift and the date of the sale. However, by paying the taxes on the gifted interest, Client will effectively make additional “gifts” to the trusts for her sons, without using any additional Lifetime Exemption, thus allowing the three trusts to grow income-tax free.

Please note that when making gifts, one should be careful to consider the capital gains tax implications of future sales. When making gifts, the recipients generally use the donor’s basis in the gifted asset, rather than the value as of the date of the gift. Therefore, when the LLC is sold in the example above, the three sons’ trusts will have capital gains taxes to pay based on Client’s original basis in the LLC. However, with a Grantor trust structure, the Client would generally pay the capital gains taxes on behalf of each trust, further increasing the value of each trust.

A gifting strategy, like the example above, would involve the collaboration of your Sessa & Dorsey attorney with your corporate counsel, accountant, and financial advisor. If you are interested in exploring a similar strategy, it is vital to start the process early. If you wait until you are ready to sell your business, and if you have a letter of intent from a prospective buyer in hand, you may lose out on some of the valuation opportunities. Because the letter of intent from a buyer is evidence of an established fair market value, waiting until an offer is pending may greatly reduce any valuation discounts. Further, this type of gift should not be rushed as there are various factors which require careful consideration. Waiting until 2025 to start these discussions is not recommended.

If you are interested in exploring this gifting strategy, please reach out to your Sessa & Dorsey attorney today, or contact our office.


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