Updated October 13, 2026 · By James G. Burns, Esq.

A business that appreciates quickly can create an estate-tax problem. Giving it away can create a different problem: lost control, reduced cash flow, gift-tax exposure, or a less favorable income-tax basis for the recipient. A growth forecast alone is not a reason to gift an asset.

For California founders and families, compare the complete outcomes before changing ownership. The decision should reflect the actual asset, remaining exclusion, expected holding period, liquidity, retained rights, and family objectives.

Start With Basis and Ownership

The IRS explains that determining the basis of gifted property requires the donor's adjusted basis, fair market value when gifted, and any gift tax paid. Appreciated property generally carries the donor's basis to the recipient, subject to applicable adjustments. Loss-property rules can differ. Property qualifying as acquired from a decedent generally receives a basis determined under the inheritance rules, with exceptions.

Ask the tax adviser to establish the actual basis before comparing strategies. A business's headline valuation does not show its tax basis, entity-level consequences, debt, or the tax on a future sale.

Model the Transfer Tax at the Gift Date

The 2026 federal estate and gift tax basic exclusion is $15 million per individual. Prior taxable gifts can reduce what remains available. A large gift can require a return and can create current gift tax; it is not automatically tax-free merely because the donor uses a trust.

Compare the proposed transfer value with the actual available exclusion before projecting future estate-tax savings. A modeled transfer of a $45 million business must account for the gift-date tax and valuation assumptions, not just the appreciation later removed from the estate.

Grantor-Trust Status Does Not Create an Automatic Basis Adjustment

IRS Revenue Ruling 2023-2 addresses an irrevocable grantor trust funded by a completed gift whose assets were not included in the deceased grantor's gross estate. Under the ruling's facts, those assets did not receive a Section 1014 basis adjustment at the grantor's death. Income-tax ownership and estate inclusion are separate questions.

Have the advisers explain the result under the proposed document and retained rights. “Grantor trust” is a classification, not a complete answer about basis, creditor exposure, or inheritance.

Compare More Than Two Headline Tax Rates

Ask the advisory team to prepare a comparison using consistent assumptions for:

• Current asset value and supportable valuation methods.
• Adjusted basis, debt, depreciation, and any entity-level tax.
• Available exclusion and gift tax at the proposed transfer date.
• Projected appreciation and a range of possible sale dates.
• Estate inclusion and potential basis treatment at death.
• Federal and applicable state income and transfer taxes.
• Administration costs, access to income, and the family's remaining liquidity.

Use several scenarios, including lower growth, an earlier sale, a decline in value, and different lifetimes. An assumed future tax saving is a projection, not a client result or a guarantee.

Review Retained Rights and Family Access

Before a gift, identify the rights the owner wants to retain and have counsel evaluate the consequences. Receiving an annuity, benefiting indirectly through a spouse, and directing a business are different arrangements. A SLAT and a GRAT should not be described as interchangeable ways to keep the same income.

Ask who can make distributions, who controls business decisions, and what happens after divorce, death, incapacity, or a trustee change. If the owner cannot tolerate the proposed loss of access or control, the tax illustration has not solved the planning problem.

Coordinate the Asset With the Rest of the Plan

Compare the entity agreements, trust terms, account registrations, insurance, succession roles, and the intended beneficiary arrangements. For a California business, our business-succession services address those connections. Our 2026 estate-tax guide provides a broader transfer-tax review.

PPLI has a separate insurance and suitability analysis; it should not be presented as an automatic fix for an appreciated asset's basis. See our California PPLI suitability checklist and PPLI legal-planning services.

Begin With Risk Exposure Mapping

At the Law Office of James Burns in Aliso Viejo, we identify tax, ownership, liquidity, authority, and succession gaps before selecting documents. Request a Situation Readiness Briefing to discuss the review process. The required work and fee are determined after examining the matter and defining scope.

Sources

• IRS Publication 551: basis of gifted and inherited assets.
• IRS Revenue Ruling 2023-2: completed-gift grantor trust and basis.
• IRS: 2026 estate and gift tax exclusion.
• IRS Form 709: gift and generation-skipping transfer tax reporting.

About the Author

James G. Burns, Esq., LL.M., is the founder of the Law Office of James Burns in Aliso Viejo. His practice focuses on coordinated estate planning, asset protection, and succession planning.

Disclaimer and Copyright

General educational information, not individualized legal, tax, financial, or valuation advice. Facts, documents, ownership, retained rights, and current law require review with qualified advisers. No tax result is guaranteed. Reading or submitting an inquiry does not establish an attorney-client relationship. Original commentary © 2026 Law Office of James Burns; no ownership is claimed in cited government materials.