Passing On a Business: Sale, Gift, or Transfer at Death
The main ways ownership moves to the next generation or to employees, and how each one is taxed for the person leaving and the person taking over.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
A business can pass to the next owners by sale, by gift, or at death — and the tax differs sharply. A sale creates gain but gives the buyer basis. A lifetime gift uses the exemption and carries over the owner's low basis. A transfer at death is included in the estate but steps up basis.
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How do the main routes compare?
| Route | Tax to the owner | Basis to the successor | Typical use |
|---|---|---|---|
| Outright sale | Capital gain (and some ordinary income) | Full purchase price | Sale to managers or a third party |
| Installment sale to family | Gain spread as paid; interest income | Full price | Child buys over 10–15 years |
| Gift | No income tax; uses the annual exclusion ($19,000 per recipient in 2026) and lifetime exemption | Owner's basis carries over | Shifting growth to the next generation |
| Sale to an intentionally defective grantor trust | No gain recognized; owner pays the trust's income tax | Carryover | Larger estates freezing value |
| Transfer at death | Included in the estate; estate tax only above the exemption | Stepped up to market value | Owners who hold until death |
| Employee stock ownership plan | Sale to the plan; possible gain deferral for C corporation sellers | Purchase price | Companies with no family successor |
The 2025 tax law set the estate and gift exemption at $15 million per person for 2026, indexed for inflation after 2026, so most family businesses face no federal estate tax — which makes the basis step-up at death the dominant consideration for many owners.
What role do valuation discounts play?
Gifts or sales of minority interests, or interests in an entity with transfer restrictions, are commonly valued below a pro-rata share of the whole because of lack of control and lack of marketability. Discounts let more of the business move within the exemption, but they require a qualified appraisal and Form 709 disclosure to start the statute of limitations on the gift.
What are the traps?
- Gifting away a low-basis business the family will later sell forfeits the step-up at death.
- Recapitalizing into preferred and common stock to freeze value triggers special valuation rules that can treat the retained preferred as worth nothing for gift tax.
- Loans forgiven year by year are gifts and need interest at the applicable federal rate.
- S corporation status limits who can own shares; trusts must qualify.
- Buy-sell agreements must be in place before a transfer so the successors and remaining owners are protected.
Frequently asked questions
Should I sell or give the business to my children?
If they can pay and you need the income, a sale gives them basis and you a note. If the estate is well under the exemption and you do not need the proceeds, holding until death often produces the lowest total tax.
Can I keep control after gifting shares?
Yes, by gifting non-voting shares or limited partnership interests while retaining voting control, within the valuation rules.
Is an ESOP realistic for a small business?
Generally for companies with stable profits and enough employees to justify the setup and annual costs; very small firms rarely qualify economically.
Does Florida have an estate tax?
No. Only the federal estate tax applies to Florida residents.
Official sources
The IRS explains: “The Working Families Tax Cuts Bill (WFTC) was signed into law on July 4, 2025 as Public Law 119-21. WFTC amends § 2010(c)(3) by increasing the basic exclusion amount to $15,000,000 for calendar year 2026.” — Internal Revenue Service, What's new — Estate and gift tax, https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax
The IRS explains: “If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift.” — Internal Revenue Service, Publication 551 (12/2025), Basis of Assets, https://www.irs.gov/publications/p551
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk compares the after-tax result of a sale, a gift, and a transfer at death for your family. See pricing or book a free fit call.
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