The Hidden Risk of Appreciating Business Value
For Silicon Valley founders and executives, a business or concentrated startup equity often represents the largest portion of their net worth. Rapid appreciation in a private business can create a massive and often unexpected “problem” of exceeding the federal estate tax exemption amount. This issue is critical because assets exceeding this threshold can face a top marginal tax rate of 40%.
Effective planning means addressing wealth transfer before a significant liquidity event, such as an IPO or acquisition. Since California does not impose a state estate tax, Bay Area families only contend with the federal levy. However, the federal exemption level is high. For 2026, the federal lifetime exemption for gift and estate tax is $15 million per individual, or $30 million for a married couple. Despite the absence of state tax, proactive gifting is the key strategy to legally exclude future appreciation from your taxable estate.
Strategic Gifting: Leveraging Time and Valuation
One powerful tool for business owners to reduce their estate size is gifting shares in the business, either directly or to a trust. This strategy is effective because the gift and estate tax exemption applies to the value of the shares at the time of the gift.
If a business is projected for high growth, gifting shares when the valuation is lower ensures that all future appreciation occurs outside of the owner’s estate. This ability to “freeze” the taxable value now saves millions in estate taxes later.
Sophisticated gifting strategies rely on two core components:
- Valuation Discounts: Transferring non-controlling, illiquid shares allows for valuation discounts, which reduce the dollar value of the These discounts are applied for lack of control (non-voting shares) and lack of marketability (private, illiquid shares). A reduced valuation utilizes less of the owner’s lifetime exemption.
- Professional Valuation: Due to close IRS scrutiny of valuation discounts, obtaining a professional valuation of the business is essential to ensure the gifted shares are valued appropriately and to avoid future transactional challenges.
Using Trusts to Retain Control
A common hesitation among business owners is the reluctance to give up control of the company. However, a gifting strategy can be carefully structured to separate the economic value of the shares from the voting power.
Advisors frequently use irrevocable trusts, such as Intentionally Defective Grantor Trusts (IDGTs) or Spousal Lifetime Access Trusts (SLATs), for wealth transfer. These structures allow the business owner to gift non-voting shares to the trust while retaining the voting shares, thereby maintaining management control over the company.
For business owners who have already navigated complex equity compensation like Restricted Stock Units (RSUs) or Employee Stock Purchase Plans (ESPPs), utilizing trusts for wealth transfer is the logical next step in financial architecture.
Keep in mind that gifts exceeding the annual gift tax exclusion must be tracked against the lifetime exemption amount. For 2026, the annual exclusion is $19,000 per recipient, or $38,000 for a married couple electing to split the gift.
Proactive Planning for Generational Wealth
The primary lesson for high-net-worth professionals is that wealth creation must be paired with proactive tax and estate planning. Waiting until a business is sold at a premium dramatically increases the value of the gift, consuming far more of the lifetime exemption than necessary.
Business wealth transfer planning requires coordinating with multiple specialists, including financial advisors, estate attorneys, and valuation professionals. This level of comprehensive planning can help ensure that the gifting strategy aligns with both your financial needs and your legacy goals.
If you are a business owner or executive with significant concentrated wealth, identifying and addressing these specialized issues now can save your heirs millions in taxes down the road. If you are ready to review your current structure and seek specialized guidance, learn more about identifying potential vulnerabilities in your strategy, contact us and we will reach out promptly.
For a broader overview of tax reduction strategies applicable to your high-income profile, review: 7 Tax Strategies for Tech Professionals to Help Maximize RSUs and Long-Term Wealth.
Works Cited
“2026 Adjustments to Estate, Gift, Generation-Skipping Transfer Tax, and Income Tax Brackets.”
Harris Beach Murtha, Harris Beach PLLC, 25 Nov. 2025.
“2026 Estate Tax Exemption and Planning Considerations.” Faegre Drinker, Faegre Drinker Biddle & Reath LLP, 25 Nov. 2025.
“California Estate Tax: Everything You Need to Know.” SmartAsset, 26 Jan. 2026. “California Estate Tax in 2025.” Robert Hall & Associates, 29 Jan. 2025.
“Everything You Need to Know About California Estate Tax.” BottomLine Lawyers, 25 Feb. 2026. “5 Wealth Transfer Strategies for Family Businesses.” Comerica, 22 Jan. 2024.
“Gifting Strategies For Business Owners To Save Tax Dollars.” Kitces.com, 25 Mar. 2026.
“New Federal Law Affects 2026 Estate Planning Exemptions.” Federated Insurance, 27 Dec. 2025.
“Planning for 2026: Trusts and Estates Tax Updates.” Seyfarth Shaw LLP, 25 Dec. 2025.
“Three Wealth Transfer Strategies Every Business Owner Needs To Know.” Katten, 23 May 2023. “What’s new — Estate and gift tax.” Internal Revenue Service, 25 Feb. 2026.
