18 Aug Estate Planning to Do Before (Not After) You Sell Your Business
A business owner I work with sold his company for $40 million. Good outcome. He’d built it over 25 years. Before his earnout, his actual take-home was closer to $30 million. The problem was timing. He did his estate planning after the sale. By then, his estate was $30 million in cash and marketable securities. No discounts available. No growth left to capture inside a trust. No way to move business value out of his estate at a reduced transfer tax cost. The planning tools that would have saved his family millions were only available while he still owned the business.
This is one of the most expensive planning mistakes selling business owners make. They wait until after the liquidity event to plan. And by then, the best options are gone.
Why the Window Closes at Closing
Estate planning for business owners works best when the asset is illiquid, hard to value, and expected to appreciate. A closely held business checks all three boxes. Once you sell, the asset becomes cash. Cash is easy to value (it’s worth exactly what it is), carries no discounts, and doesn’t appreciate inside a trust any differently than it would outside one. The planning advantage disappears.
When you own the business, you can transfer interests at a discounted value. You can move growth into irrevocable trusts before the sale, so the appreciation happens outside your estate. You can use grantor trust structures that let you pay the trust’s income tax, which is itself a tax-free gift to the trust beneficiaries. All of this depends on acting before the deal closes.
Valuation Discounts: The Concept That Drives the Math
When you own 100% of a private company, the company has a fair market value. But a 30% interest in that same company isn’t worth 30% of the whole. It’s worth less, because a minority owner can’t control the business, can’t force a sale, and can’t easily sell their interest on the open market. The IRS recognizes this. Minority interest discounts and lack-of-marketability discounts can reduce the transfer value of a business interest by 25% to 40%, depending on the facts.
This is where Family LLCs and Family Limited Partnerships come in. You contribute the business (or business interests) to a family entity, then gift or sell limited partnership interests or LLC membership interests to irrevocable trusts for your children. The limited interests carry discounts. A $10 million business might support $6 million to $7 million in discounted transfers. The discount is real, defensible, and approved by the IRS, as long as the entity is properly structured and has a legitimate business purpose beyond tax savings.
Moving Growth Out of Your Estate
The second piece is capturing future appreciation outside your taxable estate. If your business is worth $15 million today and you expect it to sell for $25 million in three years, the $10 million in growth is the target. Irrevocable trust structures like GRATs (Grantor Retained Annuity Trusts) and SLATs (Spousal Lifetime Access Trusts) are designed for exactly this. You transfer the asset now, at today’s value. The growth happens inside the trust. When you die, the growth isn’t in your estate. For more about how GRATs work, see GRATs in Estate Planning.
Another approach is an installment sale to an intentionally defective grantor trust. You sell the business interest to the trust in exchange for a promissory note. The trust pays you back over time, with interest at the applicable federal rate. If the business grows faster than the interest rate on the note, the excess growth passes to your beneficiaries free of transfer tax. And because the trust is a grantor trust for income tax purposes, the sale isn’t taxable. I explain the income tax benefit of grantor trusts in more detail here: Why the Wealthiest Families Pay Their Trust’s Income Tax on Purpose.
The State Tax Angle
New York, Massachusetts, and several other states impose their own estate taxes at thresholds well below the federal $15 million exemption. New Jersey’s estate tax was repealed in 2018, but the state still imposes an inheritance tax on transfers to non-lineal heirs. New York’s exemption is around $7 million, with a cliff that can make the entire estate taxable if you exceed the threshold by more than 5%. For business owners in these states, pre-sale planning can be the single most valuable step in the entire exit process. The difference between planning ahead and planning after can be millions of dollars in unnecessary taxes.
Liquidity Planning: Where ILITs Fit
Even with the best transfer planning, some estate tax exposure may remain. And once the business is sold, the owner loses the ability to stretch estate tax payments over 14 years under IRC §6166. That election is only available for active business interests, not cash or securities. The full estate tax bill comes due in nine months. An Irrevocable Life Insurance Trust (ILIT) provides the cash to cover it, without forcing your family to liquidate investments at the worst possible time. The reason to establish the ILIT before the sale, not after: the owner is younger, healthier, and more insurable now. And placing the policy in an ILIT from inception avoids the three-year lookback rule that can pull the death benefit back into the estate if you wait too long. I discuss how ILITs work here: Irrevocable Life Insurance Trusts.
When to Start
The planning should happen minimum 12 to 24 months before a sale, not after you sign the LOI. Once a letter of intent is signed, the value of the business is arguably fixed, and the IRS will scrutinize any transfers made after that point. The further in advance you act, the more defensible the valuation, and the more time the trust has to capture growth. If you’re thinking about selling in the next few years, the time to have this conversation is now. For a broader look at how estate planning and business ownership intersect, see Estate Planning for Business Owners.
The tools are available. They’re well-established. They work. But they only work if you use them while you still own the business.
Planning to Sell Your Business in the Next Few Years?
For advisors: Have a client dealing with this? I do quick consult calls for advisors working through complex planning situations.
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For business owners and families: At Garza Law, we are selective in choosing our clientele. We work with a select group of families every year to help them protect their legacy. If what you read here raised questions about your own situation, you can apply here:
Related Reading
GRATs in Estate Planning. How GRATs transfer appreciation to the next generation at little or no gift tax cost.
Estate Planning for Business Owners. The unique estate planning challenges that come with owning a business.
Trusts: Revocable vs. Irrevocable. The fundamental distinction behind every trust-based estate plan.
Irrevocable Life Insurance Trusts. How an ILIT removes life insurance from your estate and provides liquidity for estate taxes.