Avoid Estate Tax with Strategic Planning.
Don’t let a huge tax bill dismantle your business legacy. Our guide shows you how to use powerful strategies like gifting and trusts to preserve your company’s value for the next generation.
Want to Pass the Business Without Giving the IRS a Huge Piece First?
Theresa founded a logistics company in the 1980s. Built it from one cargo van to 92 trucks—no succession plan. No trust. Her children—Jordan and Felicia—disagreed constantly. When Theresa died, the estate valuation exceeded $21 million. The federal estate tax exemption had dropped. No gifting. No GST allocation. The IRS demanded $3.2 million within nine months. Jordan forced a line of credit. Felicia pushed for liquidation. They lost control of three major contracts during the chaos. Every dollar went to taxes and debt service. An early plan could’ve kept the empire intact.
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Steven F. Bliss Esq.
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What Estate Taxes Apply During Business Succession?
Federal estate tax applies to estates exceeding the exemption limit—currently $13.99 million per individual (2025). Everything above that gets taxed at a flat 40%. Businesses often hold illiquid value—equipment, goodwill, real estate, not cash.
Visual metaphor: estate tax behaves like a vacuum—it doesn’t care if the value is in forklifts or farmland. It sucks value indiscriminately. California lacks a state-level estate tax, but estate administration remains governed by Probate Code §8800, which mandates an inventory within four months of appointment.
From my years of experience, business estates without advanced structuring fail to convert hard assets into soft tax savings.
How Can Gifting Reduce Future Estate Tax Exposure?
Gifting assets during life is a powerful strategy that locks in lower valuations and removes future appreciation from the estate. Annual exclusion gifts, which can be up to $18,000 per recipient, allow you to move equity slowly without using the lifetime exemption. Larger gifts apply against the exemption but permanently remove growth. This strategy can significantly reduce your future estate tax exposure, providing a sense of control and security.
Think of gifts like valves on a pressure tank. Turn them often, and the system stays balanced. Wait too long, and the build-up bursts in probate court. From our firm’s extensive case reviews, families that gift equity over 10–15 years reduce estate tax liability by up to 28%, especially when layering discounts through LLCs or FLPs.
However, it’s crucial to note that poorly timed or undocumented gifts can create IRS exposure under IRC §2036 and §2038, pulling assets back into the estate. This underscores the need for careful planning and execution, ensuring that your gifts serve their intended purpose of reducing your estate tax liability.
What Went Wrong Without a Gift Plan?
Theresa retained 100% ownership with no lifetime transfers. No discounts. When she passed, the IRS appraised the business using peak earnings. Her children couldn’t justify valuation reductions. The full amount triggered estate tax on every dollar above the exemption.
Conversely, a second-generation manufacturer gifted 15% equity to each child over five years, applying minority interest and lack-of-marketability discounts. IRS accepted the valuations. The shares passed free of tax. Control remained with the parent. Value escaped the estate.
How Do Discounts Impact Gift and Estate Tax Calculations?
Ownership interests lacking control or marketability may qualify for valuation discounts between 20% and 40%. These apply when interests are non-controlling, non-transferable, or subject to operating agreements. The IRS recognizes these under IRC §2701 and §2704.
Visual metaphor: picture discounted shares like puzzle pieces—valuable when part of a set, but limited when isolated. Discounts reduce the gift’s reportable value, increasing the number of units that can be passed without exceeding exemption limits.
Nevertheless, California Probate Code §16060 demands that trustees report accurate and supportable values. Unsupported discounts invite audit and reversal.
What Is the Generation-Skipping Transfer Tax (GSTT) and Why Does It Matter?
The GSTT applies to transfers made to individuals two or more generations below the transferor, often grandchildren. It adds a 40% tax on top of the estate or gift tax if no exemption applies. The GST exemption matches the estate exemption—$13.99 million per person in 2025—but must be affirmatively allocated on IRS Form 706 or 709.
Imagine GST like a toll gate—skipping one generation requires an extra payment. Without planning, trusts that distribute to grandchildren or great-nieces trigger tax even after an estate tax was already paid.
Analysis of recent trends indicates over 35% of California estate plans fail to allocate the GST exemption, leading to surprise liability on irrevocable trust distributions.
What Happens When GST Exemption Is Missed?
Theresa created a basic irrevocable trust in her final year. Named the grandchildren as contingent beneficiaries. No exemption allocated. IRS taxed $1.1 million on top of the estate tax owed. The grandchildren received less than 40% of the intended distributions.
Conversely, another client established a dynasty trust—allocated GST exemption with each lifetime gift. The trust grew over two decades and funded education and home purchases for four grandchildren. Zero GST tax assessed. The exemption preserved everything.
What Role Do Trusts Play in Minimizing Business Succession Tax?
Trusts freeze asset value, separate voting rights, and prevent estate inclusion. Common tools include:
- Grantor Retained Annuity Trust (GRAT) – passes appreciation while retaining income
- Intentionally Defective Grantor Trust (IDGT) – allows installment sales without gift tax
- Irrevocable Life Insurance Trust (ILIT) – funds tax bills with non-taxable proceeds
From my observations, businesses without trust layering are exposed to valuation spikes during ownership transition. The IRS penalizes simplicity. Sophistication shields value.
What Happens When IRS Form 706 Isn’t Filed Correctly?
Form 706 allocates GST exemption, claims estate deductions, and locks in portability. Improper filing delays estate closure and increases audit odds. The IRS rejects incomplete filings. Executors must itemize assets, attach appraisals, and coordinate trust reporting.
Probate court findings underscore that Form 706 rejections delay distributions by up to 14 months and increase professional fees by 22% during resolution phases.
When Should Tax Planning for Business Succession Begin?
Ordinarily, planning starts when the business reaches $5–$10 million in enterprise value or when children join operations. From my years of experience, waiting until retirement invites compressed timelines, rushed valuations, and reduced flexibility.
Moreover, lifetime planning allows annual reviews, coordinated gifts, and insurance structuring to fund future tax liabilities.
What Happens When Everything Aligns Correctly?
One software firm gifted shares through an FLP, layered insurance inside an ILIT, and sold non-voting interests to an IDGT. The GRAT transferred appreciated assets over ten years. When the founder died, the estate filed Form 706 with a zero taxable estate. IRS accepted every valuation. Business operations never paused. Heirs received complete voting control. No tax. No court oversight. No delay.
Just Two of Our Awesome Client Reviews:
Estrellita Cadang:
⭐️⭐️⭐️⭐️⭐️
“Steve walked us through how the gift tax rules worked and helped us value the company before my dad passed. We used a GRAT and a trust sale. I now own the business cleanly, and we avoided over a million in tax.
Ben Dunning:
⭐️⭐️⭐️⭐️⭐️
“Steve explained how to use GST exemptions for my grandchildren through a long-term trust. I had never heard of that tax before. Now we’re protected across generations, and our estate plan is finally aligned.”
axes should not dictate who inherits a business.
Sit down with Steve Bliss and design a business succession plan that uses every available legal tool—gift exemptions, trust strategies, and GST allocations. Build early. Document thoroughly.
👉 Shift growth without shifting control. Preserve the company’s momentum while freezing the IRS out of the equation.
👉 The plan starts with one clear, strategic conversation—make it this week.
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