Seize the Opportunity
Strategic Gifting Before 2026
The Tax Cuts and Jobs Act of 2017 presented an opportunity by significantly raising lifetime gift and estate tax exclusions, but this window is closing soon. With the exclusions set to expire at the end of 2025, there is an urgency to plan your gifts sooner than later.
Imagine it is December 2025, and you have a chance to gift $14 million to your children without incurring a single dollar in federal gift tax. Fast forward just one day to January 1, 2026, and that same gift could trigger a whopping $2.8 million in taxes. This is not just a hypothetical scenario; it is a very real possibility that many may face based on current tax law.
The Tax Cuts and Jobs Act of 2017 opened a golden window of opportunity by significantly raising lifetime gift and estate tax exclusions, but this window is close to closing. With the generous exclusions set to expire at the end of 2025, there is an urgency to plan your gifts sooner than later. Don not wait until it is too late; discover the strategies to maximize your wealth transfer to your family rather than Uncle Sam.
Understanding Gift Tax
A gift tax is a federal tax imposed on the transfer of assets between individuals, whether or not they are related. The applicable tax rate is 40 percent for all taxable gifts exceeding $1 million. Additionally, certain states also impose gift and estate taxes. As of 2024, the lifetime federal gift and estate tax exemption is $13.61 million per person making the gift. This exemption is expected to include an inflation adjustment in 2025. However, current exemption levels are set to decline in 2026 to approximately $7 million. This means a married couple could gift up to $27.2 million in 2025 before incurring federal gift tax, but could only gift approximately $14 million in 2026 before incurring taxes.
Who Pays the Gift Tax?
A common misconception is that the recipient of the gift pays the gift tax. In reality, the gift tax is the responsibility of the transferor, not the recipient. Therefore, the person making the gift is liable for the tax and the recipient is not responsible for the tax on the gift.
Relationship Between Gift Taxes and Estate Taxes
Any unused lifetime gift tax exemption can be applied upon the death of an individual. For instance, if the exemption is $14 million in the year of death and $6 million in gifts had been made, $8 million of assets could be transferred upon death before estate tax would be triggered. Conversely, if an individual had fully utilized their exemption by making gifts during their lifetime, there would be no exemption available upon death, making all remaining assets transferred at death subject to tax.
Post-2025 Exemption Levels
Predicting future tax laws is akin to guessing what tonight’s lottery numbers will be. If there is no change in the current tax law, the current lifetime exemption amount will decrease significantly in 2026, meaning an individual could face a significantly higher tax burden for making gifts in 2026 compared to 2025. Additionally, there will be no claw back for gifts made prior to 2026 if the exemption decreases that year.
For example, if someone had $14 million in assets, he or she could transfer the full amount on December 31, 2025, without triggering gift tax. If that individual died one day later, on January 1, 2026, no estate tax would be owed even though $14 million in prior gifts had been made and the estate tax exemption was only $7 million at the time of death. Therefore, if gifts are in excess of $7 million per transferor and these are made in the future, then there are tax consequences. The prevailing thought under the current tax law is to make these gifts prior to the end of 2025 to avoid up to $2.8 million of taxes that would be incurred otherwise; either when future gifts are made or upon death.
Ideal Assets for Gifting
Ownership interests in privately held companies are the most tax-efficient assets to gift. Non-controlling (or minority) ownership interests in privately held companies can be discounted to account for lack of control and lack of marketability, reducing the taxable value of the gift. These discounts can range from 35–45 percent of the pro rata share of a company’s value, allowing a significantly higher amount of value to be transferred before gift tax is triggered.
Discounts can also apply to gifts of ownership interests in family holding companies that hold marketable securities, offering a path for liquid assets to be discounted for gift tax purposes. However, these entities must be properly formed and operated to ensure the IRS does not challenge the validity of the gift.
Valuation of Ownership Interests in Privately Held Companies
Unlike publicly traded companies, there is no readily available pricing for privately held companies. As a result, ownership interests in these companies must be valued using asset, income, and market-based approaches. The valuation methodologies employed require a comprehensive analysis of the company’s historical and projected financial performance. The results of the analysis are expressed as a conclusion of value as defined by the American Institute of Certified Public Accountants and presented in a detailed report including financial analysis, company background, industry and economic analysis, as well as the application of valuation methodologies.
Privately held companies are most often valued by valuation experts. While many CPAs are valuation experts, not all CPAs are credentialed in this area. Valuation relies heavily on finance concepts, which are not traditionally the primary focus of CPAs. Therefore, it is crucial to engage an experienced valuation expert to prepare the valuation to meet the IRS standards for a qualified appraisal, which must be attached to the filed gift tax return.
Timing for Preparing a Valuation
Typically, it takes four to six weeks to prepare a valuation. However, there is likely to be a rush at the end of 2025 to complete gifts and their related valuations before the gift tax exemption is reduced in 2026. Therefore, it is advisable to start the process as early as possible in 2025 to avoid potential delays. Waiting until the fourth quarter of 2025 may result in appraisers being fully booked and unable to accept additional projects.
Taking prompt action on what may be a once in a lifetime opportunity has the potential to significantly reduce future tax liabilities. Ensuring that gifting plans are in place before the anticipated decrease in the exemption amount in 2026 is essential. For those with substantial assets, the time to act is now.
Sean Saari, CPA, ABV, CVA, MBA, is a lead managing director in CBIZ’s Forensic Consulting Services group. He assists valuation and litigation support clients by developing credible and defensible analyses, and he has testified as a financial and valuation expert numerous times. His practice is concentrated in the areas of business valuations, litigation advisory services, domestic disputes, shareholder disputes, financial reporting, complex damages analysis and modeling, strategic planning, succession and estate planning, and mergers and acquisitions. He is a frequent author and speaker on valuation, litigation advisory, business management, and other financial topics.
Mr. Saari can be contacted at (440) 459-5865 or by e-mail to Sean.Saari@Marcumllp.com.
Ashley Mercuri, CPA, ABV, CVA, is a director in CBIZ’s Forensic Consulting Services group. She began her professional career as a Certified Public Accountant (CPA) and pivoted into a practice concentrated in the areas of business valuations, litigation advisory services, financial reporting, complex damages analysis and modeling, strategic planning, and succession and estate planning. Throughout her career, Mrs. Mercuri has expanded her professional knowledge across a variety of industries; she has obtained her Certified Valuation Analyst (CVA) and Accredited in Business Valuation (ABV) credentials. She consistently demonstrates her industry expertise through speaking engagements and the authoring of articles on valuation and litigation-related topics.
Ms. Mercuri can be contacted at (216) 242-0872 or by e-mail to Ashley.Mercuri@cbiz.com.
