Estate Planning Before a Business Valuation Increase

Estate planning before a business valuation increase can shift future growth to your heirs while shares are worth less. Start well before any offer.

A gift is valued on the day you make it. If your company is about to be worth more, because a buyer is circling, a big contract is signing, or earnings are climbing, shares you transfer now are valued on today's facts. With the right structure, the growth after that date can build outside your taxable estate. Owners call this an estate freeze. Done early, it can move much of that growth. Done after a letter of intent, it often captures less.

What is an estate freeze, and why do it before the valuation goes up?

An estate freeze shifts the growth on the shares you transfer to the next generation, usually through a trust. Depending on the structure, you may keep voting shares, an annuity, or a promissory note. Shares you keep can still grow inside your estate, and what you keep has to be structured so it does not pull the transferred shares back in.

The reason timing matters is in the gift tax rules. Treasury regulations value a gift at the price a willing buyer would pay a willing seller, both with reasonable knowledge of the relevant facts, as of the date of the gift. A signed letter of intent, a private equity term sheet, or a recapitalization that sets a new price is a relevant fact. An appraiser has to weigh it, and it usually pushes the value up, though it does not automatically set the value. Developments a buyer could reasonably foresee can matter even before an offer exists, so having no offer yet does not by itself lock in a low value.

The earlier a freeze happens in a company's growth, the more of that growth it can move.

Estate freeze

A transfer designed to shift the future growth on business interests to heirs or a trust, outside your taxable estate.

Grantor retained annuity trust (GRAT)

A trust that pays you a fixed annuity for a set term and passes whatever is left to your beneficiaries.

Grantor trust

A trust whose income is taxed to you, the person who created it. An irrevocable grantor trust used in a freeze is drafted so its assets are also kept out of your estate; grantor trust status alone does not do that.

Section 7520 rate

The IRS interest rate used to value annuities and remainders. It is 120 percent of the federal midterm rate for the month of the transfer.

Valuation discount

A reduction an appraiser may apply to a minority or nonvoting interest because the holder cannot control the company or easily sell the shares.

Which estate freeze techniques do business owners use?

Three tools do most of this work, sometimes together. Each one fits a different situation, and each one carries its own risk.

1. Gift minority, nonvoting interests

Many owners first recapitalize the company into voting and nonvoting shares, keep the voting shares, and give nonvoting shares to their children or to a trust. A minority, nonvoting interest often appraises for less per share than a controlling interest, because the holder cannot direct the company or easily sell. The IRS can challenge the size of any discount, so the appraisal has to stand on its own.

For the 2026 tax year, present-interest gifts of up to $19,000 per recipient generally fall under the annual exclusion. Gifts of restricted shares or gifts into a trust may not count as present interests, so they need a closer look. Taxable gifts use part of your basic exclusion amount, which is $15,000,000 per person for 2026, and gift tax can be due once that is used up. Report the gift on Form 709 and describe how the value was reached. If a gift is not adequately disclosed on the return, the IRS's normal time limit to challenge its value does not run.

2. A grantor retained annuity trust (GRAT)

You transfer shares to a GRAT and keep the right to a fixed annuity, paid at least once a year, for a set number of years. Section 2702 treats that annuity as a qualified interest. The taxable gift is the shares' value when you fund the trust minus the present value of your annuity, calculated with the Section 7520 rate. The annuity can be set so that gift is small.

If you outlive the term, whatever is left after the annuity payments and expenses passes to your beneficiaries without an additional gift. That remainder is larger when the shares' total return beats the Section 7520 rate. If returns fall short, little or nothing may be left for your beneficiaries, and the annuity payments return the trust's assets to you. You have still paid to set it up and used whatever exclusion the initial gift required. That trade-off makes a GRAT worth considering for a company whose value could jump.

The main risk is timing of a different kind. If you die before the term ends, Treasury regulations pull part or all of the trust back into your estate. Shorter terms reduce that risk.

3. Sell shares to a grantor trust for a note

You make a gift to an irrevocable grantor trust to give it some assets of its own, then sell it shares in exchange for a promissory note. The note carries interest at least equal to the applicable federal rate, which the IRS publishes monthly. In a properly structured sale for full fair market value, growth above the note's interest and the trust's costs stays with the trust's beneficiaries, outside your estate.

Because the tax code treats you as the owner of a grantor trust, its income is taxed to you. The IRS has ruled that paying that income tax is not an additional gift to the trust's beneficiaries. Paying it from your own money lets the trust keep assets it would otherwise spend on tax. In general, a sale to that trust is also not treated as a taxable sale for income tax purposes. That point comes from IRS Revenue Ruling 85-13 rather than the text of the statute, so your CPA should confirm it for your facts.

The note has to be real. It needs a payment schedule, the trust needs to pay it, and the shares need a defensible appraisal. If you die with the note still outstanding, the note itself is part of your estate.

A freeze is less about what the company is worth today than about who owns the growth that comes next.

Older freezes built on preferred stock still exist, but they require analysis under the special valuation rules in Section 2701, which govern the interest you keep in those deals.

Does a freeze still matter with a $15 million exemption?

For many owners, the answer depends on where the company is headed, not where it is today. For the 2026 tax year, each person can pass $15,000,000 through lifetime gifts and at death before federal estate and gift tax applies, and the generation-skipping transfer tax exemption is also $15,000,000. The 2025 tax law raised the amount and removed the drop that had been scheduled.

A business worth $9 million today may not be a problem. The same business after a successful exit, added to real estate, retirement accounts, and other investments, may be. A freeze is planning for the estate you expect to have. Gifts can also use exemption at today's lower values, and generation-skipping exemption can be allocated to gifts to a trust for grandchildren. A sale for full fair market value does not itself use either exemption, though the gift that funds the trust may. A GRAT is a poor fit for the generation-skipping goal, because generation-skipping exemption generally cannot be allocated until the annuity term ends, at the value then.

When is it too late to freeze?

There is no legal deadline. There is a practical one. Each of these events can raise the value an appraiser uses:

• A signed letter of intent or term sheet
• A formal valuation done for a buyer or a lender
• A large contract, license, or customer win that is likely to close
• A recapitalization or new investment at a stated price

Starting a year or more before a sale process gives your attorney time to draft and your appraiser time to value the company. A GRAT's term does not have to end before a sale, but the longer the term, the longer you have to outlive it. For the tax side of the sale itself, see our pre-exit tax checklist, and for the documents every owner needs first, see estate planning basics before a transaction.

Who needs to be involved?

A freeze touches valuation, trust law, and tax reporting at once. A qualified appraiser values the shares. Your estate planning attorney drafts the recapitalization, the trust, and the note. Your CPA prepares the gift tax return and tracks the grantor trust's income. Anchor provides tax strategy and coordination, not legal documents or tax filing, so you keep your own attorney and CPA. Our role is making sure the three of them work from the same plan and the same timeline. Here is how that coordination works.