A private equity buyer often asks the seller to roll part of the proceeds into the buyer's holding company. The owner takes cash for one slice and units in the buyer's holdco for the rest. Between the first banker conversation and signing, the value the buyer will pay is the fact that changes the estate plan. A gift of the equity after that price is fixed is a gift of the deal. A gift before the price is fixed is a gift of an interest in a closely held business, valued on today's facts, often with discounts for lack of control and lack of marketability. Appreciation after a completed gift — including the step-up the transaction produces — generally sits with the donee, outside the donor's taxable estate, and it consumes less of the donor's lifetime gift and estate tax exclusion than the same transfer made at the deal price.
The vehicle advisers usually discuss is a limited partnership owned by, or for the benefit of, an irrevocable trust. The donor transfers interests while the value is still the pre-deal value. The partnership, not the donor personally, then holds the equity that rolls. This article is the map of that sequence for referring bankers, family offices, and RIAs. It is not tax advice, and it is not a promise that a given transfer will be respected. Outcomes depend on timing, the documents, what the donor keeps, and who the donor is.
Why Timing Is the Planning
For a U.S. citizen or a person domiciled in the United States, gift and estate tax share one basic exclusion amount. Legislation enacted on July 4, 2025 — Public Law 119-21 — amended Section 2010(c)(3) and set that amount at $15 million for gifts made, and estates of decedents dying, in 2026. Rev. Proc. 2025-32 confirms the $15 million figure, confirms that the generation-skipping transfer exemption under Section 2631(c) is also $15 million for 2026, and provides that both amounts are adjusted for inflation for later years. The same revenue procedure sets the Section 2503(b) annual exclusion for 2026 at $19,000 per donee, and only for a present interest. The 2025 legislation replaced the reduction that had been scheduled after 2025. Congress can change the figure again. A plan that needs today's exclusion to exist, unchanged, in a later year is relying on an assumption.
The exclusion is consumed by the value of what is given, not by the value the asset later reaches. That is why a transfer before a letter of intent, and certainly before a signed purchase agreement, is a different gift from a transfer after the price is the price. There is no Code section that blesses a gift made a set number of days before an LOI. The question is whether, on the gift date, the sale was still uncertain. A non-binding process, a range of outcomes, and real negotiation still ahead are one set of facts. A signed agreement, a waived financing condition, or a price the parties are already performing are another. Advisers who wait for "certainty that the deal will happen" have usually waited until the valuation thesis is gone.
Two limits on the annual exclusion matter in this pattern. A gift of a partnership interest to a trust is often a future interest, so the $19,000 exclusion may not apply unless the instrument creates a present-interest right that actually works. And gift-splitting under Section 2513 — which can let a spouse's exclusion be used — generally requires a spouse who is a U.S. citizen or resident and who consents. It is often unavailable when one spouse is a non-resident alien. The lifetime exclusion, not the annual exclusion, is what usually does the work on a pre-closing transfer of business equity.
Appraisal, Discounts, and Adequate Disclosure
The gift-tax value is the fair market value of the interest transferred, on the date of the gift, under the willing-buyer, willing-seller standard. It is not the banker's exit case, and it is not 100 percent of the company if what was transferred was a minority or non-controlling interest. Lack-of-control and lack-of-marketability discounts are sometimes available. They are not a schedule. They depend on the rights in the partnership agreement, the distribution of voting power, the transfer restrictions that a real buyer would respect, and the appraisal that supports them. Chapter 14 of the Code — Sections 2701, 2703, and 2704 — can ignore retained senior interests and certain agreements or liquidation restrictions. A discount that exists only because the family agreed, the week of the gift, to a restriction they can remove is the fact pattern those rules were written for.
The return is part of the value. A U.S. person who makes a gift above the annual exclusion generally files Form 709. Adequate disclosure is what starts the ordinary three-year period for assessment. The regulations under Section 6501 generally require a description of the property and the parties, the relationship between them, and a description of how the value was determined — and, where a discount is claimed, enough detail, or an appraisal by a qualified appraiser, that the Service can see the method. A return that reports a round number and attaches nothing does not do that work. If the gift is not adequately disclosed, the period can stay open, and the deal price that becomes public later is the number an examining agent will start from. The appraisal should be commissioned for the interest that was actually given, as of the gift date, not recycled from a later quality-of-earnings report.
Gift to a Trust-Owned Partnership, Sale to an IDGT, or a GRAT
Three structures cover most of what referring advisers are asked to compare. They are not interchangeable, and none of them is a form to sign the week of closing.
A gift to a trust-owned limited partnership. The donor moves a non-controlling interest into a partnership whose limited partner is an irrevocable trust, or contributes the business interest to the partnership and then gives limited-partner units to the trust. The gift is valued at the discounted, pre-deal value. If the gift is complete, later appreciation — including the rollover step-up — accrues to the trust. The donor who stays on as general partner, funds personal expenses from the partnership, or can join with the family to liquidate it has often not completed the transfer for estate tax. Those are Section 2036 and 2038 facts. We treat them in Family Limited Partnerships and Trust-Owned LPs.
A gift versus a sale to an intentionally defective grantor trust. A gift uses exclusion now and shifts appreciation. A sale uses less exclusion — typically a seed gift, plus any bargain element — and takes back a note. While the trust is a grantor trust, the sale is generally disregarded for income tax, and the donor, not the trust, reports the income. The note stays in the estate; appreciation above the note's hurdle generally does not, if the sale is respected. The comparison, including the applicable federal rate and why a non-U.S. settlor often cannot use this pattern, is in Selling to an Intentionally Defective Grantor Trust Versus Gifting.
A GRAT, as an alternative rather than as the default. A grantor retained annuity trust under Section 2702 pays the donor a qualified annuity. Appreciation above the Section 7520 hurdle can pass to the remainder for a small taxable gift. If the donor dies during the term, the property is generally back in the estate, and the estate-tax inclusion period makes a GRAT a poor way to move exemption to grandchildren at the outset. It assumes a U.S. person who can be expected to survive the term. It is usually the wrong instrument for a non-resident alien whose gift of intangible property is not subject to U.S. gift tax, and a poor fit when a sale may close inside an annuity term that was not built around a live deal.
What the Rollover Looks Like Once the Partnership Holds the Equity
If the planning has worked, the limited partnership — not the founder personally — is the holder of the slice that will roll. The trust owns the limited-partner interest. Beneficiaries benefit through the trust. They are not the sellers of record, and they should not receive the rollover units by a "cleanup" distribution back to the donor after signing.
At closing, that slice typically splits into cash and equity in the buyer's holdco. The cash is sale proceeds. The equity is the rollover. Where the holdco is a partnership and the seller contributes property solely for a partnership interest, Section 721 generally provides nonrecognition, with no 80 percent control test. That is why a partnership or LLC is the usual home for a partial rollover: the cash is taxable, and the units can be received without gain, subject to the disguised-sale rules, the investment-company limitation, and liability shifts. Where the buyer is a corporation, Section 351 generally requires the transferors as a group to control it immediately after, and boot is recognized gain. In a sponsor-controlled deal the sellers often lack that control, so 351 is frequently unavailable for the same cash-and-rollover mix. See Section 351: Tax-Free Transfers to Corporations. The tax adviser models boot and liabilities before anyone calls the rollover tax-free.
The built-in gain does not disappear. Property gifted during life takes a carryover basis under Section 1015. It does not receive the basis step-up Section 1014 generally allows for property acquired from a decedent. A successful gift therefore trades estate-tax exclusion of future appreciation for income tax on the historical gain when that gain is recognized — at the rollover, only on the taxable slice; on the rolled units, generally later, when the partnership interest is sold or the built-in gain is allocated. If the trust is a grantor trust, the donor reports that income. If it is not, the trust or its beneficiaries do. Both results are design choices.
The Risks That Undo the Sequence
Step transaction and assignment of income. Courts can collapse steps that are in substance one transfer. If the partnership is formed, funded, and sold in a transaction that was already practically certain, the Service can treat the donor as having given the proceeds, at the deal price. A donor who already has a fixed right to those proceeds generally cannot assign the income by assigning the paper. A gift signed the morning of the purchase agreement is not a fact pattern to defend.
Retained interests and Chapter 14. Sections 2036 and 2038 include property when the donor keeps the enjoyment, the income, the right to say who enjoys it, or the power to alter the transfer. A donor who remains general partner, and whose economics are unchanged, is the case that loses. Section 2701 can revalue the gift when the donor keeps a preferred or other applicable retained interest. Sections 2703 and 2704 can ignore restrictions that exist only by family agreement.
The contracts, the return, and the basis. Shareholder agreements and rights of first refusal commonly prohibit a transfer without consent, and the buyer's draft will require the sellers in the disclosure schedules to be the real owners. A breach can be void and can give a co-owner a purchase right. Consent, investor status, and KYC belong before the gift. See Gifting Ahead of a Liquidity Event. Form 709, with the appraisal and with adequate disclosure, is what makes the value a filed position. Equity left in the estate generally takes a Section 1014 step-up at death. Equity successfully given takes a Section 1015 carryover basis. Removing the appreciation and keeping the step-up, in the same shares, is not the ordinary result.
When the Donor or the Trust Is Not a U.S. Person
The exclusion arithmetic above is a U.S.-person analysis. A non-resident alien — a non-citizen who is not domiciled in the United States — is generally not subject to U.S. gift tax on a transfer of intangible property. Stock, and generally a partnership interest, is intangible. A gift of those interests can fall outside U.S. gift tax even when the company is American. U.S.-situs real property and tangible personal property located in the United States are different: those gifts are generally taxable, and a non-resident alien does not receive the lifetime basic exclusion amount that citizens and domiciliaries use. The annual exclusion can still apply to a present interest. Home-country gift and income tax are a separate system and are often the binding constraint. See U.S. Gift Tax for Non-Resident Aliens.
Estate tax is not gift tax. U.S. corporate stock that can generally be given by a non-resident alien without U.S. gift tax is generally U.S.-situs property at death, where the estate tax exemption for a non-resident alien is the limited statutory amount — $60,000 — rather than the basic exclusion amount. Whether a partnership interest is U.S.-situs at death is fact-specific and is not answered by the gift-tax rule for intangibles. A rollover into a U.S. partnership or U.S. corporation changes what the family owns, and it can change situs. Classification of the vehicle — corporation, partnership, or disregarded entity — is the same election we discuss in The Form 8832 Election in Offshore Holding Structures and, where a Canadian partnership is the holding layer, in Canada LPs in Cross-Border Wealth Structures.
The trust's classification decides whether the transfer did the job the family thinks it did. A foreign grantor trust that still treats the settlor as owner under Section 672(f) may leave the income, and often the estate-tax exposure, with the settlor. A foreign non-grantor trust can complete the transfer and then produce throwback tax if a U.S. beneficiary later receives accumulated income. Neither label survives unchanged when someone already in the family becomes a U.S. person — by green card, substantial presence, or domicile — or when a child is born a U.S. citizen. The rollover vehicle, especially a foreign corporation, can become a PFIC or a CFC in that person's hands, and a transfer to a foreign trust can implicate Section 679. See FGT vs. FNGT for International Families and When a Family Member Becomes a U.S. Person.
The work belongs with private wealth counsel before the process is live: the partnership and the trust formed and funded, the appraisal in hand, the consents requested, and deal counsel told who the seller will be. A rollover that is negotiated on the founder's personal cap table, and "fixed" with a gift after the price is set, is a different transaction from the one this article describes.