How (and Why) to Gift Fractional Shares of a Business
According to data from the U.S. Census Bureau, roughly a quarter of businesses in the U.S. are family-owned businesses, meaning two or more family members exercise control, either concurrently or sequentially.
Photo by Martin Baron on Unsplash
These businesses are in every industry and range from two-person partnerships to Fortune 500 companies, but one thing they have in common is the need for succession planning. Without a well-structured plan, families face disputes, hefty tax bills, or even the forced sale of the business.
One potential solution that provides both succession and estate planning benefits is gifting fractional shares of the business over time. This approach lets you transition ownership strategically while taking advantage of tax benefits.
Understanding Annual and Lifetime Gift Limits
The IRS provides two tax breaks you can leverage when gifting fractional shares of a business:
Annual gift tax exclusion. In 2025, you can gift up to $19,000 per recipient per year without filing a gift tax return or using any of your lifetime exemption. That limit changes annually with inflation.
Lifetime gift and estate tax exemption. The lifetime exemption is $13.99 million per individual (or $27.98 million for married couples) in 2025.
That lifetime exemption applies to gifts and estate taxes combined. So any gifts you make during your lifetime beyond the annual exclusion limit reduce the amount you can use for the estate tax.
By gradually gifting shares under the annual exclusion limit, you can transfer substantial ownership over time without any tax implications.
For example, say you and your spouse own a business and have three adult children. In 2025, you can each gift a fractional share of the company worth up to $19,000 to each of your three children. That would give each child a minority interest in the business and move $114,000 out of your taxable estate. Repeat that every year over several years, and you’ve transferred a substantial portion of your net worth without any tax consequences.
You might think your estate isn't worth nearly $27.98 million, so why bother? Well, the Tax Cuts and Jobs Act of 2017 more than doubled the lifetime exemption. But it's scheduled to drop to the 2017 amount ($5.49 million, adjusted for inflation) at the end of this year. While Congress could step in to extend the higher exemption or make it permanent, you may want to transfer ownership now rather than taking a "wait and see" approach.
How to Substantiate Value When Gifting the Family Business
Before gifting fractional shares, it's essential to substantiate the value of that gift with an accurate business valuation. A professional valuation considers factors such as revenue, profitability, industry trends, and market conditions.
If you file a gift tax return (because, for example, the fair market value exceeded the annual gift exclusion amount), you'll need to attach the valuation. Once the IRS accepts the appraised fair market value for gift tax purposes, it can't raise the valuation issue again for estate tax purposes.
Taking advantage of marketability and minority interest discounts
When you transfer ownership of a business to a family member, you may want the value of the business to be as low as possible.
One way to solve this issue without impacting future growth is to take advantage of valuation discounts:
Lack of marketability discount. Since private business shares are harder to sell than publicly traded stocks, a marketability discount reflects that reduced value.
Minority interest discount. A non-controlling share in a business has less influence over company decisions, leading to a lower valuation.
These discounts reduce the taxable value of the gifted shares, maximizing the ownership transfer while minimizing gift and estate tax exposure. A business valuation specialist can apply these discounts for you to come up with an accurate fair market value of the shares being transferred.
Other Considerations When Transferring Ownership of a Family Business
Your advisors can help you tackle the tax, financial, and legal issues involved in a family business transition. Still, it's often just as important to address the relationships, emotions, and communication issues that crop up between family members. Here are a few potential challenges to consider.
Future control and decision-making
Gifting shares means relinquishing some control over your business. Make sure new shareholders understand their roles and responsibilities. If you want to retain decision-making power, consider gifting non-voting shares.
Avoiding family disputes
Dividing a business equally among children may seem fair, but it can create operational conflicts. If only one child is actively involved in the company, they may have a hard time managing day-to-day operations alongside passive stakeholders.
Discuss potential alternatives with your financial planner. For example, you may be able to compensate non-active family members with other assets.
Buy-sell agreements
A buy-sell agreement ensures that if a gifted shareholder wishes to sell their shares, they must first offer them back to the company or other shareholders. This prevents ownership from falling into the hands of unintended parties.
Impact on business growth and financing
If your business requires outside capital, spreading ownership among multiple individuals could complicate borrowing and investor relations. Make sure your succession plan aligns with the company's future goals.
Crafting a Thoughtful Succession Plan
Many business owners gift fractional shares of family businesses for succession and estate planning purposes, but it requires careful planning and execution to structure gifts within IRS limits, get the proper valuations, and address potential management challenges.
To develop a strategy tailored to your unique situation, contact Slate. We're happy to answer questions about the process and help you determine whether it's the right move for you.