Gifting equity: Strategically and effectively 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 can 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.

Advantages of gifting equity early

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

Some of the benefits to gifting early stage shares:

• Reduce future estate tax exposure by moving appreciating assets out of your estate
• Transfer wealth tax-efficiently to heirs or loved ones
• 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 considerations: Act Early To Maximize Outcomes

Timing can make or break your equity gifting strategy.

Consider the difference in gifting shares before versus after a major event like an IPO. A pre-IPO gift locks in the lower value for tax purposes — so future appreciation benefits the recipient, not your estate. A post-IPO gift may still be meaningful, but comes with a higher gift tax cost.

The IRS taxes gifts based on the fair market value (FMV) at the time of the gift — not the future value. That means it's often best to gift shares before they appreciate significantly, such as before a Series B funding round, IPO or acquisition.

To establish the fair market value, use a qualified 409A valuation from a third-party firm. It's recommended to seek a qualified appraisal specifically for gift tax. If the IRS believes you under-reported the share value, you could owe additional taxes and penalties. A formal appraisal helps document the value and reduce the risk of a challenge or dispute.

You can also take advantage of 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. Consider spreading gifts across multiple years or recipients to maximize impact.

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

Gifting to children: Utilizing the right trust structure

Founders should consider utilizing trust structures to maintain control and plan for the future:

• 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 effectively "supercharges" the gift by allowing the trust to grow tax-free to the recipient.
• 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): Married couples can reduce their future estate tax liability by including the spouse as the current beneficiary through a grantor trust that makes them the current beneficiary of assets.

These structures also help delay access to wealth until children are ready — avoiding sudden windfalls that can create more harm than good.

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), gifting can significantly enhance the tax 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 on or after July 4, 2025. However, the holding period resets at the time of the gift, and recipients must meet the three- to five-year holding requirement themselves to benefit from the exclusion. Timing and documentation are key.

Don't forget legal and governance issues. Private companies often have restrictions on share transfers. Review your shareholder agreements, notify your board and consult legal counsel before moving forward.

Support and solutions from your team of advisers

Equity is one of the most valuable assets a founder owns. Gifting shares to family can be a powerful way to share success, plan for the future and manage taxes. But it’s not a simple process.

The right team — your attorney, tax adviser and private banker — can help you navigate each step, from valuation and trust creation to compliance and communication.

At Citizens Private Bank, we work closely with founders and entrepreneurs to tailor estate and gifting strategies that match your goals, values and company stage.

Learn how Citizens Private Bank can help you preserve your legacy.