Gifting Pre-IPO Shares to Trusts: Estate Planning Before the Valuation Jumps

Transferring private company stock to a trust while its value is still modest can move future appreciation out of a taxable estate. The technique is powerful, irreversible, and easy to get wrong.

Estate planning tends to be an afterthought for founders and early employees until a banker mentions an IPO. Shares valued at a few dollars each under the company's latest appraisal may be worth many multiples of that within a year or two, and a gift made at today's value uses only today's value of the donor's exemption. Federal estate and gift law in 2026 is generous, with a $15 million per-person exemption that is now permanent and indexed, but a successful Bay Area exit can exceed that figure quickly, and the value of early planning grows with the size of the outcome.

The basic idea

Under current law, each person may transfer up to the exemption amount during life or at death without federal transfer tax, and may also make annual exclusion gifts of $19,000 per recipient that do not count against it. Gifting pre-IPO shares to an irrevocable trust for children or other beneficiaries locks in the gift-tax value at the time of transfer. As a Withers analysis of pre-IPO planning puts it, any increase in value following the IPO happens after the gift is made, in the hands of the recipient, and a donor who plans early enough can use the pre-IPO value of the stock.

Consider a hypothetical. A founder gifts shares appraised at $2 million to a trust eighteen months before an IPO. The company lists, the lockup expires, and the same shares are worth $20 million. The founder used $2 million of exemption; the $18 million of growth is outside the estate and, depending on the trust's design, may be shielded from estate tax for multiple generations.

Common structures

An outright gift to an irrevocable trust is the simplest form. Grantor retained annuity trusts, which the Withers article describes as a common technique for assets expected to appreciate sharply, let the donor contribute stock, receive annuity payments back over a term of years, and pass the excess growth to beneficiaries with little or no gift tax cost. Sales to intentionally defective grantor trusts, spousal lifetime access trusts, and dynasty trusts are also used, each with distinct mechanics and trade-offs that require an experienced estate attorney.

Grantor trust status is a recurring feature: the donor continues to pay income tax on the trust's income, which allows the trust assets to grow undiminished by tax but becomes a burden when the trust later sells shares and generates a large gain the donor must fund personally.

Valuation and reporting

Gifts above the annual exclusion are reported on Form 709, which also records the allocation of the generation-skipping transfer exemption. For private stock, the value reported should be supported by a qualified appraisal; the company's 409A valuation is a useful reference point but is prepared for a different purpose. Discounts for lack of marketability and minority interest are commonly applied to private stock, and they are also the part of the appraisal most likely to be scrutinized.

Interactions with QSBS and company restrictions

Qualified small business stock retains its character when transferred by gift. Under Section 1202(h), the recipient is treated as having acquired the stock in the same manner as the donor and as having held it for the donor's holding period. Because the exclusion cap applies per taxpayer, and the per-issuer limit is $15 million for stock acquired after July 4, 2025, gifts to multiple non-grantor trusts are sometimes used to multiply the available exclusion. This is an area of active IRS attention, and trusts created purely to stack exclusions carry audit risk.

Company documents matter too. Transfer restrictions, rights of first refusal, and board approval requirements generally apply to gifts as well as sales, and unvested shares or unexercised options usually cannot be transferred at all.

Irrevocable means irrevocable; the donor gives up access to the shares and their proceeds. Gifted stock does not receive a step-up in basis at the donor's death, so the trust inherits the donor's low basis and will owe capital gains tax when it sells, including California tax if the trust or its beneficiaries are California residents. If the company fails, exemption has been consumed on an asset that became worthless. And the legal and appraisal costs are real.

This article is educational only and is not tax, legal, or investment advice; anyone considering gifts of private company stock should consult a qualified estate planning attorney and tax professional.

Important Disclosures

Important Disclosures: Propulsion Capital Management is an investment adviser registered with the State of California Department of Financial Protection and Innovation. Registration does not imply a certain level of skill or training. This article is provided for general informational and educational purposes only and does not constitute investment, tax, legal, or accounting advice, nor an offer or solicitation to buy or sell any security or to adopt any particular investment strategy. The information is believed to be accurate as of the date of publication but is subject to change without notice; tax laws and regulations change frequently and their application depends on individual facts and circumstances. Nothing herein should be relied upon as a substitute for personalized advice from a qualified professional. Investing involves risk, including the possible loss of principal, and past performance is no guarantee of future results. Diversification does not ensure a profit or protect against loss. Any examples are hypothetical, are for illustrative purposes only, and do not reflect the experience of any client. Links to third-party websites are provided for convenience; Propulsion Capital Management does not endorse, and is not responsible for, the content of third-party sites. Propulsion Capital Management does not provide tax or legal advice; please consult your tax adviser or attorney regarding your specific situation.