Gifting equity: Considerations for transferring shares

You've worked hard to build a successful business. Now you want to share the rewards with loved ones. One way is by gifting equity by giving shares to children or other family members. If implemented effectively, these gifts may reduce estate tax exposure and pass on future upside to the beneficiary.

Whether you're designing a long-term estate plan or simply preparing for a near term liquidity event, gifting equity requires a thoughtful strategy. The following are some key considerations for when to gift, how to structure the transfer, how to navigate valuations and what tax and legal risks to watch out for.

The value of gifting equity sooner

Early stage shares often have modest valuations but hold a lot of upside potential. As a result, gifting equity to children or other family members can be a powerful strategy for founders looking to preserve wealth, reduce tax exposure and plan for the future.

Early‑stage equity gifts may offer benefits such as:

• Reducing future estate tax exposure by moving appreciating assets out of your estate
• Moving wealth to heirs or loved ones in a tax‑efficient manner
• Gifting nominal amounts today when the value is low, limiting the impact to your lifetime gifting exemption
• Potential to qualify for qualified small business stock (QSBS) treatment

Timing matters: Early action helps maximize benefits

The timing of an equity gift is a critical factor that can significantly influence the effectiveness of your overall strategy.

Consider the potential differences between gifting shares before or after a major liquidity event, such as an IPO. Gifting prior to such an event generally uses the fair market value (FMV) at that earlier date, which may be lower; any future appreciation would typically accrue to the recipient. Gifting after a valuation‑changing event may result in a higher FMV being used for gift‑tax purposes.

The IRS generally assesses gift tax based on the FMV at the time the gift is made. For this reason, some individuals choose to gift shares before a potential increase in valuation, such as prior to a Series B funding round, IPO, or acquisition.

To help establish the fair market value, individuals typically rely on a qualified 409A valuation from a third-party firm. Obtaining a gift‑tax‑specific appraisal can provide documentation supporting the valuation. If the IRS determines that the reported value was too low, additional tax or penalties could apply.

You may also be able to utilize the annual gift tax exclusion, currently set at $19,000 per recipient in 2025. That means you could gift $19,000 in equity to each child, sibling or other recipient each year without using up your lifetime exemption or triggering gift tax. Clients often consider distributing gifts across multiple years or among several recipients as part of a broader wealth‑transfer strategy.

Even if you stay under the annual limit, you may wish to file IRS Form 709 to start the statute of limitations and document the gift.

Gifting to children: Understanding trust structure options

Founds may consider utilizing various trust structures to support long-term planning and maintain oversight over transferred equity:

• Irrevocable trusts can be used to make outright gifts of shares while removing them from your taxable estate. You can appoint a trustee to manage the assets, set rules around when and how the beneficiary receives them and potentially shield the assets from creditors or poor financial decisions.
• An Intentionally Defective Grantor Trust (IDGT) lets the shares grow outside your estate while you continue to pay income taxes. This structure helps preserve the trust's full growth potential for future beneficiaries by preventing tax obligations from reducing the trust's value. By paying the trust’s income tax liability, the grantor may also reduce the value of their taxable estate without making an additional gift to the trust.
• Grantor Retained Annuity Trust (GRAT): Useful for transferring assets expected to appreciate, such as pre-IPO shares, with minimal gift tax consequences.
• Spousal Lifetime Access Trust (SLAT): A SLAT allows married couples to transfer assets out of their taxable estate while providing the beneficiary spouse potential access to trust distributions during their lifetime.

These structures can also help manage when and how children access wealth, supporting responsible stewardship and mitigating some of the risks associated with sudden or unmanaged inheritances. Each trust structure has potential benefits and limitations, and should be evaluated with qualified estate planning and tax counsel based on your circumstances.

Tax and compliance considerations

Beyond timing and structure, you'll want to keep tax law and compliance front of mind.

If your shares qualify as qualified small business stock (QSBS), this may allow each individual to benefit. Each recipient may claim their own QSBS exclusion — up to $15 million or 10x the stock's basis, whichever is greater — for stock acquired after July 4, 2025. In the case of a gift, the recipient generally succeeds to the donor's holding period for QSBS purposes, but the exclusion limit applies separately to each taxpayer. Timing and documentation are key.

It is also essential to review any legal or governance limitations on transferring shares. Many private companies restrict transfers through shareholder agreements or board‑approval provisions, so founders should evaluate these requirements and consult legal counsel before proceeding.

Support, guidance and resources from your team of advisers

Equity is often one of a founder's most valuable assets. Gifting shares to family members can play a meaningful role in long-term planning, but doing so requires careful consideration of the legal, tax and governance implications involved.

The right team — your attorney, tax adviser, private wealth advisor and private banker — can help you navigate the steps involved, such as valuation, trust structures, documentation and communication.

At Citizens Private Bank, we collaborate with founders and entrepreneurs to help them evaluate estate and gifting approaches that align with their goals, values and stage of business development.

Learn how Citizens Private Bank can support your planning needs and help you work toward preserving your legacy.