Understanding the Lifetime Gift Tax Exemption: A Critical Window for Founders

Quick Overview

The Lifetime Gift Tax Exemption allows you to transfer significant assets—including company equity—to trusts and beneficiaries without triggering gift tax. Currently at a historic high of $13.99 million per person for 2025, this exemption is scheduled to be cut roughly in half on January 1, 2026. This article explains how the exemption impacts equity transfers to trusts, the reporting requirements via Form 709, the upcoming reduction, and strategies founders should consider before this valuable tax benefit is significantly reduced. Understanding this closing window of opportunity could save founders millions in future tax obligations.

What Is the Lifetime Gift Tax Exemption?

The Lifetime Gift Tax Exemption is the total amount you can give away during your lifetime or after your death without paying federal gift tax. This exemption is unified with the estate tax exemption, meaning any portion you use during your lifetime reduces what's available to shield assets from estate tax at your death.

For 2025, the exemption stands at $13.99 million per individual—the highest it has ever been. Married couples can effectively combine their exemptions, allowing transfers of up to $27.98 million without gift tax consequences.

Any gifts that exceed the annual gift tax exclusion (currently $19,000 per recipient) count against this lifetime exemption unless they qualify for specific exceptions.

How the Exemption Impacts Equity Transfers to Trusts

When transferring company equity to trusts—a common strategy for QSBS stacking and estate planning—the lifetime gift tax exemption plays a crucial role:

Valuation Matters

When you transfer equity to a trust:

• The fair market value of the shares counts against your lifetime exemption

• The lower the company valuation, the less exemption you use

• Transferring early in a company's lifecycle preserves more of your exemption

Growth Outside Your Estate

Once equity is transferred to an irrevocable trust:

• All future appreciation occurs outside your taxable estate

• Only the value at the time of transfer counts against your exemption

• This makes early transfers particularly powerful for high-growth companies

Impact on QSBS Stacking Strategies

For founders implementing QSBS stacking with trusts:

• Each trust funded with company equity uses a portion of your exemption

• The amount of equity you can transfer is directly limited by your available exemption

• Maximizing transfers before the exemption drops can significantly increase potential tax savings

Form 709: Required Reporting for Trust Transfers

Any time you transfer assets that exceed the annual gift tax exclusion ($19,000 per recipient in 2025), you must file IRS Form 709 (United States Gift and Generation-Skipping Transfer Tax Return).

Key Requirements for Form 709:

• Filing deadline: Form 709 must be filed by April 15 of the year following the gift

• Extensions: Extensions are available but must be specifically requested for this form

• Spousal consent: Married couples can elect gift-splitting, effectively doubling the annual exclusion amount

• Documentation: Proper valuation documentation is essential, especially for privately-held company stock

Why Filing Is Critical, Even When No Tax Is Due:

• Starts the statute of limitations clock for the IRS to challenge the valuation

• Creates a record of your lifetime exemption usage

• Provides documentation for your QSBS planning

• Establishes a clean trail for future tax compliance

At Promissory, we ensure all trust transfers are properly documented with Form 709 filings, providing both compliance and strategic protection.

The 2026 Exemption Reduction: A Closing Window

The current historically high exemption amount is not permanent. Under the Tax Cuts and Jobs Act of 2017 (enacted during the first Trump administration), the increased exemption is scheduled to expire on December 31, 2025.

What Happens in 2026:

• The exemption is set to revert to the previous base amount of $5 million, adjusted for inflation

• This will likely mean an exemption of approximately $6.5-7 million in 2026

• This represents roughly a 50% reduction from the current $13.99 million

• Any unused portion of the current higher exemption will be lost

Political Uncertainties:

• The exemption reduction could be extended by future legislation

• However, there's no guarantee of extension given changing political priorities

• Current budget pressures make permanent extension less likely

• Some proposals have actually advocated for even lower exemption amounts

This creates a "use it or lose it" situation that makes strategic planning before 2026 particularly important.

Strategic Considerations Before the Reduction

Given the scheduled reduction, founders should consider several strategies to maximize the current high exemption:

1. Accelerate Trust Planning

If you've been considering establishing trusts for QSBS stacking or estate planning:

• Implementing before 2026 allows you to transfer significantly more assets

• This is particularly valuable for early-stage companies expected to grow substantially

• The exemption applies when the gift is made, so future growth is sheltered even after the exemption drops

2. Focus on Appreciating Assets

The most strategic assets to transfer under the current high exemption are those with:

• Current lower valuations but high growth potential

• Qualified small business stock for QSBS stacking

• Assets that might otherwise create future estate tax issues

3. Consider Spousal Lifetime Access Non-grantor Trusts (SLANTs)

For founders concerned about access to assets:

• SLANTs allow indirect access through your spouse while still utilizing the exemption

• Creating SLANTs before the exemption drops maximizes the benefit

• This provides both tax advantages and continued family accessibility

4. Leverage Discounted Valuations

For privately-held company stock:

• Legitimate valuation discounts for lack of marketability and minority interests may apply

• These discounts allow you to transfer more economic value within the exemption limits

• Professional valuation documentation is essential to support these positions

Real-World Example: Maximizing the Current Exemption

A founder I spoke with had built a tech company valued at approximately $20 million, with her ownership stake worth about $12 million. She was concerned about the future growth of the company and the impact of the reduced exemption in 2026.

Working with advisors, she implemented a strategy that included:

• Transferring $10 million in company equity to a series of trusts for QSBS stacking

• Using $10 million of her lifetime exemption (leaving approximately $4 million still available)

• Completing all transfers in 2025, well before the scheduled reduction

• Documenting everything meticulously with Form 709 filings

If her company continues on its growth trajectory, her company could be valued at over $100 million, and the trusts will hold assets worth approximately $50 million (tax free). Had she waited until after 2026, she would have been limited to transferring only about half the equity, resulting in significantly higher eventual tax obligations.

By using the current high exemption before it expired, she effectively transferred an additional $5 million in equity that would have otherwise remained in her estate, saving her family millions in eventual estate taxes.

What Happens if You Exceed the Exemption?

Understanding the consequences of exceeding the lifetime exemption is important:

Gift Tax Implications

If your gifts exceed your available lifetime exemption:

• Gift tax applies at rates up to 40%

• This tax must be paid by the donor, not the recipient

• The tax is calculated on the amount that exceeds your available exemption

Strategies for Larger Transfers

If your planned transfers would exceed the current exemption:

• Consider installment sales to trusts rather than outright gifts

• Explore grantor retained annuity trusts (GRATs) which can transfer appreciation with minimal gift tax impact

• Implement annual gifting strategies to utilize the annual exclusion ($19,000 per recipient in 2025)

Planning Timeline: When to Act

Given the scheduled reduction, here's a timeline for strategic planning:

2025 Planning:

• Last full year before exemption reduction

• Obtain professional valuations for your company equity

• Design appropriate trust structures for your goals

• Expect increased scrutiny of last-minute planning

• Ensure all documentation is complete and defensible

Post-2026 Planning:

• Adapt to the lower exemption environment

• Focus on other planning techniques

• Continue annual exclusion gifting

• Monitor for any legislative changes

Key Takeaways

• The lifetime gift tax exemption is currently at a historic high of $13.99 million per person

• This exemption is scheduled to be cut approximately in half on January 1, 2026

• Form 709 must be filed for transfers exceeding the annual gift tax exclusion

• Early transfers of equity to trusts can maximize QSBS stacking benefits and preserve more of your exemption

• The 2026 reduction creates a strategic window that founders should carefully consider

• Even if no tax is currently due, proper documentation is essential

• Exceeding the exemption triggers gift tax rates of up to 40%

• Planning before 2026 could save millions in future tax obligations

Disclaimer

Tax laws are complex and constantly evolving. While this article provides general information about the lifetime gift tax exemption, it should not be considered legal or tax advice. Each situation is unique, and tax treatment can vary based on individual circumstances. Always consult with qualified tax and legal professionals before making decisions based on the information provided here.

Ready to maximize your lifetime gift tax exemption before the 2026 reduction? Promissory streamlines the entire process from equity valuation to trust creation and Form 709 preparation—all in one platform for a fraction of the cost of traditional attorney services. Create an account today and take advantage of this closing window of opportunity.