There is a major opportunity for savvy business owners and high-net-worth individuals in California right now. As we’ve noted before, the current estate and gift tax exemption is at a historic high, a product of Trump-era tax reforms. At present, individuals are able to gift up to $13.61 million in their lifetime while married couples have a lifetime limit of $27.22 million.
This establishes the upper limit that the value of an estate is capped at before estate taxes are calculated, but it also establishes the lifetime gifting limit. The total value of gifts given below these amounts won’t incur a gift tax during one’s lifetime. But, these numbers likely aren’t going to last much longer–it’s expected that, without legislative intervention from Congress, these exemptions will fall back down to earth in 2026 to the tune of roughly $7 million for individuals and roughly $14 million for married couples.
Why Does This Matter to California Business Owners?
This temporary increase presents a rare chance for business owners and high-net-worth individuals in California to transfer high-value and appreciating assets while alive, maximizing the current high exemption threshold. Properly structuring and executing these transfers presents a significant opportunity to shift the future appreciation of these assets out of your estate, sidestepping hefty gift, estate, and other tax burdens that would come with the sale or transfer of these assets upon death. Doing this now ensures that future growth occurs outside of the taxable estate, thereby reducing the eventual tax liability, and taking advantage of a higher exemption limit for gifting purposes.
Why Now?
Understanding the mechanics of this heightened exemption is important. Consider an individual with assets valued at $10 million. Under normal tax conditions, transferring these assets during one’s lifetime generally exceeds the lifetime gifting and estate tax limit. Gifting those today, however, keeps the taxable amount below the $13.61 million threshold, thus avoiding an impact on your lifetime estate or gift tax limit when you die. If the transfer happens in 2026, however, when the exemption drops to $7 million, the value of such a transfer above $7 million would face heavy tax liabilities ($3 million subject to gift taxes).
It’s important to note that the valuation of gifts is fixed at the time of gifting, meaning the exemption at the time of a gift is the exemption that applies. If you plan to exceed the projected $7 million gifting limit but below the $14 million current limit, then it makes sense to take advantage of this opportunity now before it’s too late. The timing could make literally millions of dollars in difference.
Valuation Discounts for Business Transfers
There are additional ways to manipulate the value of California business assets to remain under the current limits, as well. For instance, utilizing minority interest and lack of marketability discounts allows you to lower the value of business assets and keep you well below the previously noted exemption limits.
For example, by transferring non-voting shares, you can take advantage of these discounts while retaining full management control until an effective succession plan is established. To ensure these discounts apply, transfers should be executed well before any potential business sale to avoid IRS disputes regarding their timing. Additionally, the business’s shareholder agreement must be reviewed to confirm that the valuation methods align with these intended discounts.
Gift With Confidence
Working through these significant financial decisions requires a strategic, informed approach for California business owners. At Dahl Law Group, we regularly work with clients to ensure sound financial decisions with all possible tax consequences addressed to save money for people in Northern and Southern California. We are putting a bit of a full-court press on businesses in the Sacramento and San Diego areas to ensure this generational opportunity is not missed. Contact us today and structure your lifetime gifting to maximize tax savings while avoiding unnecessary tax liabilities.
Dahl Law Group
