Authored by: Patrick Lowry
Quick Facts
- Timing can influence tax savings: Gifting privately held stock before a potential sale may create opportunities to take advantage of valuation discounts and transfer future appreciation outside your taxable estate.
- A sale can change the valuation: As a transaction progresses, offers, negotiations, and the likelihood of closing can affect the fair market value of gifted shares and the discounts that may apply.
- Planning ahead creates flexibility: Coordinating with tax, legal, and valuation advisors early can help business owners evaluate gifting and charitable giving opportunities before a sale is underway.
For owners of privately held businesses, gifting company stock can be an effective way to transfer wealth, reduce potential estate tax exposure, and take advantage of available tax exemptions. But beyond how much you give, when you make the gift can significantly influence its valuation and potential tax benefits.
For business owners considering a future sale, planning ahead may create valuable opportunities to transfer ownership before a potential transaction affects the company’s valuation.
How Gifting Stock Can Create Tax Savings
Gifting privately held stock to family members can help business owners transfer wealth while potentially reducing the value of their taxable estate. The federal gift and estate tax exemption allows individuals to transfer a certain amount of wealth during their lifetime or at death without incurring federal gift or estate taxes, potentially reducing their overall tax liability when applicable rules are followed.
Privately held stock may also qualify for valuation discounts that reflect certain characteristics of the ownership interest, including:
- Lack of control: A minority ownership interest may not provide the ability to direct business decisions or control company operations.
- Lack of marketability: Shares in a privately held company are generally more difficult to sell than publicly traded stock.
Depending on the facts and circumstances, these discounts can meaningfully reduce the taxable value of a gifted ownership interest. The typical range for combined discounts is 30% to 40%, but in unique cases, they can go much higher.
For business owners, this can create an opportunity to transfer shares at the allowed discounted fair market value while potentially moving future appreciation outside their taxable estate. The appropriate valuation and any applicable discounts must be supported by an independent analysis of the specific ownership interest and relevant circumstances.
Why Timing Matters
The timing of a stock gift can significantly affect its appraised value. In particular, whether a business is operating as usual or actively pursuing a sale can influence how a valuation professional determines fair market value.
Business as Usual: When No Sale Is Contemplated
For gift tax purposes, fair market value is generally based on the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.
A valuation professional considers the facts and circumstances known or knowable as of the valuation date, including whether the company is contemplating a sale.
When a business has no established plan to sell, the valuation generally focuses on its standalone value, considering its assets, financial performance, business outlook, and current plans and forecasts. Depending on the ownership interest and applicable facts, discounts for lack of control and lack of marketability may also be appropriate.
Because a liquidity event may be years away or may never occur, these factors can result in a valuation that differs from the price a buyer might pay in an acquisition. To learn more about the distinction, read our article on Fair Market Value vs. Strategic Value.
Going to Market: Determining Fair Market Value When a Sale Is Being Considered
Once management decides to pursue a sale, the valuation analysis may change. As the transaction progresses, additional information becomes relevant, including:
- Discussions with business brokers or investment bankers about a potential sale and pricing expectations
- Indications of interest or potential offers from strategic or financial buyers
- Negotiations with prospective buyers
- The existence of a signed letter of intent or purchase agreement
- The likelihood of completing a transaction at a specific price compared with continuing to operate as a standalone business
As the likelihood of a transaction increases, the valuation professional must consider how the potential sale affects fair market value. Depending on the circumstances, the indicated value may move closer to the price a prospective buyer would pay.
The potential for a near-term liquidity event may also affect whether, and to what extent, discounts for lack of control and lack of marketability are appropriate. These adjustments are fact-specific and depend on the ownership interest, the stage of the sale process, and the information available as of the valuation date.
The takeaway: Gifting stock well before a potential sale may provide greater planning flexibility and create opportunities to transfer ownership at a value that reflects applicable valuation discounts. However, the appropriate timing and value depend on the specific circumstances.
If a Sale Is Already Being Considered
Business owners who are already exploring a potential sale may still have opportunities to gift stock. However, the valuation must reflect the facts surrounding the anticipated transaction, making it important to consult qualified valuation and tax advisors before proceeding.
A valuation professional can assess the likelihood of a transaction closing, the information available about potential pricing, and the impact of those factors on fair market value.
Although gifting during an active sale process may offer different planning opportunities than gifting well in advance, it is not automatically precluded. An independent appraisal can help establish and support the value of the gifted interest based on the relevant facts and circumstances.
The Same Considerations Apply to Charitable Gifts
Donating privately held stock to charity can also support a business owner’s philanthropic and tax planning goals. Depending on the circumstances, donating appreciated shares may offer tax advantages compared with selling the shares and donating the proceeds.
Timing is important here, too. If a company sale is already underway, the anticipated transaction may affect the valuation of the donated shares and the tax treatment of the contribution.
Before making a charitable gift of privately held stock, business owners should consider:
- Timing: How far along is the company in the potential sale process?
- Valuation: How should the anticipated transaction affect the value of the donated shares?
- Documentation: What appraisal and supporting records are required?
- Coordination: Have tax, legal, and valuation advisors reviewed the proposed contribution?
Planning ahead can help preserve flexibility and align charitable giving with broader financial goals.
The Value of Planning Ahead
For business owners who may eventually sell their companies, gifting and charitable planning should begin well before a transaction is underway. Early coordination among tax professionals, estate planning attorneys, legal counsel, and qualified valuation advisors can help identify planning opportunities, support appropriate valuations, and avoid unnecessary complications.
The timing of a stock gift can be just as important as the gift itself. Planning ahead may create more opportunities to take advantage of applicable valuation discounts and transfer wealth efficiently. Even when a sale is already being considered, a properly structured gift may still provide meaningful benefits.