For a Growing Business, the Same Gift Costs More Every Year
For a Growing Business, the Same Gift Costs More Every Year
October 20, 2026
What Waiting Does to a Gift of a Business Interest, and Where the Appraisal Fits
The federal estate and gift tax exemption is the amount a person can give away during life or leave at death before the tax applies. It was scheduled to decrease at the end of 2025, but the tax law commonly known as the One Big Beautiful Bill Act (“OBBBA”), signed July 4, 2025, removed the decrease. The exemption is now $15 million per person for 2026 and is indexed for inflation beginning in 2027. A married couple has $30 million counting each spouse’s own exemption. OBBBA effectively ended the deadline that had pushed many owners to act.
Delaying a gift of an interest in a growing business costs the owner in two ways. First, a gift is valued on the day it is made, so the same interest uses more of the exemption each year the gift is delayed. Second, a larger gift leaves less exemption to shelter the rest of the estate, and any part of the estate not sheltered is taxed at up to 40 percent.
The upcoming midterm elections do not clarify the picture but rather add uncertainty. A business owner with approximately $3 million in earnings before interest, taxes, depreciation, and amortization (“EBITDA”) who holds substantial assets outside the company may have an estate near or above the exemption and should likely continue the planning process under the rules known today.
How a Gift of a Business Interest Works
The figures below do not factor in the annual gift tax exclusion. A gift of an interest in a company is reported on a federal gift tax return, Form 709, generally due by April 15 of the following year. The reported value counts against the lifetime exemption, and no gift tax is due until the exemption is exhausted.
The gift is reported at fair market value. That value is the price at which the interest would change hands between a willing buyer and a willing seller, neither under any compulsion to buy or sell, and both having reasonable knowledge of the relevant facts. An interest in a closely held company has no quoted price, so the value is ordinarily supported by an appraisal as of the date of the gift. The appraisal values the interest the donor gives, not a pro rata slice of the whole company. A nonvoting minority interest cannot direct the company and has no ready market, so the appraisal may reflect discounts for lack of control and lack of marketability.
Discounts are not automatic. Whether a discount applies, and how large, depends on facts and circumstances: the company’s economics, its history of distributions, the rights attached to the interest, and the restrictions in its operating agreement, bylaws, or shareholder agreement. Some interests warrant little or no discount.
Key concept: the lifetime exemption works like a balance. Suppose an owner with no earlier taxable gifts gives a child an interest in the company appraised at $1 million. The gift is reported on a gift tax return and reduces the $15 million exemption to $14 million. No tax is due. The interest and whatever it earns afterward generally stay out of the owner’s estate.
Where Valuation Comes In
The appraisal supports the value reported on the return, and that value determines how much exemption the gift uses. The Internal Revenue Service (“IRS”) generally has three years after a gift tax return is filed to assess additional tax, but that period begins only if the gift is adequately disclosed. If it is not, the tax may be assessed at any time.
The federal regulation on adequate disclosure sets requirements for the appraisal. An appraisal that meets those requirements satisfies the valuation element of adequate disclosure, and only that element. For example, the appraiser must be a qualified appraiser who is not the donor, the recipient, a member of either family, or anyone employed by them.
The end of the year matters because a gift has to be complete by December 31 to count as a 2026 gift, and because each year of growth before the gift raises the value that is reported. The appraisal has its own timing. It must value the interest as of the actual gift date, but the final report may be completed afterward and attached to the gift tax return. Before the gift, the owner has to settle how much to give, which takes a supportable view of value, and the transfer documents have to be prepared. How long those steps take depends on the company and the schedules of everyone involved.
A Hypothetical Example
Assume Paul and Marianne Kessler each own half of Whitcombe Process Equipment, a closely held manufacturer with a total equity value of $30.0 million before any discounts. The company’s total value alone equals their combined $30 million exemption before their other assets are counted. They have two adult children. In December 2026 each parent gives each child a 7.5 percent nonvoting interest, so each parent gives 15 percent and the gifts total 30 percent. Assume the company grows 8 percent a year, and compare the same gift made ten years later. In very simple terms:
| Gift in 2026 | Same gift in 2036 | |
|---|---|---|
| Value of the whole companyIllustrative. $30.00 million compounded at 8 percent a year for ten years. | $30.00 million | $64.77 million |
| Pro rata share, 30 percentBefore any discount. | $9.00 million | $19.43 million |
| Discounts for lack of control and marketabilityAssumed at 30 percent combined for round arithmetic. Actual discounts depend on the facts and may be smaller or larger. | ($2.70 million) | ($5.83 million) |
| Appraised value of the giftFair market value as of the gift date. | $6.30 million | $13.60 million |
| Exemption remaining after the gift$30 million combined, less the gift. Assumes no earlier taxable gifts and no inflation indexing. | $23.70 million | $16.40 million |
| Additional exemption used by waiting$13.60 million less $6.30 million, for the same 30 percent interest. | $7.30 million | |
| Federal estate tax on that differenceAt the top federal rate of 40 percent, to the extent their combined estates exceed their exemptions. | $2.92 million |
The interest is the same in both columns. The exemption used to move that interest out of the Kessler estates more than doubles. The table shows the four gifts combined. Whitcombe itself is not a party to the gift. Paul and Marianne give interests they own, and the company pays nothing and owes nothing.
The 30 percent combined discount is an assumption chosen for round arithmetic, not a typical or expected result. For simplicity, the table holds the combined exemption at its 2026 level. Under current law the exemption is indexed for inflation. Making the gift earlier uses less exemption in this example, but the estate tax benefit depends on the exemptions available and the size of the remaining estates at death.
What the appraisal does for the Kesslers: each parent files a gift tax return reporting half of the $6.30 million, or $3.15 million, and those figures are what any later examination would test. The appraisal supports those figures. With adequate disclosure the three-year period begins, and without it the numbers stay open.
The Kesslers made outright gifts. The value of an interest given or sold to a trust is also ordinarily supported by an appraisal as of the date of the transfer. Which kind of trust fits depends on the facts.
In addition to the cost of waiting, making the gift has tradeoffs of its own. First, the recipient generally takes the owner’s income tax basis, the figure from which gain on a later sale is measured. An interest inherited at death generally takes a basis equal to its value on the date of death, so a later sale of a gifted interest can produce more taxable gain. Second, a completed gift is generally irrevocable. Whether these tradeoffs outweigh the benefit of giving sooner depends on the owner’s situation.
Signs It May Be Worth Exploring
- Your estate is above the exemption today, or the growth of your business is likely to carry your estate above that level.
- You planned to make gifts to your children or to a trust and set the idea aside once the scheduled 2025 decrease in the exemption was removed.
- You gave interests in your company in past years and are unsure whether the reported values were adequately supported and disclosed.
- Your company has voting and nonvoting interests, or your advisors have discussed creating them, and the nonvoting interests have never been valued.
At Eubank Capital, we provide independent, defensible appraisals of closely held business interests for gift and estate planning, including year-end gifts of voting and nonvoting interests. We value the interest that changes hands, as of the date of the gift, under the fair market value standard, and we prepare our reports to meet the appraisal requirements of the adequate disclosure regulation. We work alongside the owner’s attorney and tax advisors, who design the transfer and prepare the return.
Request a Valuation Planning Review
This article is provided for general informational purposes only and does not constitute legal, tax, accounting, or valuation advice. Any year-end gift of a business interest, use of the lifetime exemption, gift tax return and adequate disclosure filing, and related estate and income tax analysis should be reviewed and implemented by qualified legal, tax, and accounting advisors based on the reader’s specific facts and circumstances. Exemption amounts, rates, and figures are stated as of the date of publication and may change. The growth rate, values, and discounts in the example are illustrative only. The individuals and companies in the examples are fictitious, and any resemblance to real persons or businesses is purely coincidental.