Exit Planning for Family Owned Businesses: Gifting, Selling and the 2026 Rules

Exit planning for family owned businesses got easier in one specific way and no easier at all in every other way. The federal transfer tax rules that most succession advice was written against have changed: Rev. Proc. 2025-32 sets the basic exclusion amount at $15,000,000 for calendar year 2026, with the generation-skipping transfer exemption at the same figure and the annual gift exclusion at $19,000 per recipient. The scheduled 2026 sunset that would have cut the exclusion roughly in half did not happen. What remains hard is everything the tax code does not touch: what the business is worth, whether the child taking it over can pay for it, and what the children who are not taking it over receive instead.

The short version: for most family businesses, federal estate tax is no longer the binding constraint, so the real decisions are valuation, how the transfer is funded, and fairness among heirs.

This page states rules and names the body that publishes each one. It is not tax or legal advice about your family or your business, and every structure below has consequences that depend on facts only your own adviser can see.

The 2026 transfer tax numbers, and the sunset that did not happen

All of these come from Rev. Proc. 2025-32, the IRS revenue procedure setting inflation-adjusted figures for 2026.

Section 3.14 of the revenue procedure is the passage that settles the sunset question:

“Section 70106 of the OBBBA amends § 2010(c)(3) by increasing the basic exclusion amount to $15,000,000 for calendar year 2026. The basic exclusion amount is a component of the applicable exclusion amount described in § 2010(c)(2) and is used in determining the applicable credit amount against estate tax described in § 2010(c)(1) and the applicable credit amount against gift tax described in § 2505(a)(1). For calendar year 2026, the generation-skipping transfer exemption amount under § 2631(c) is equal to $15,000,000. These numbers are adjusted for inflation for taxable years beginning after December 31, 2026. The basic exclusion amount will be adjusted for inflation for calendar year 2027 and future years.”

Two things follow. First, any succession article still saying the exemption halves in 2026 was written before Public Law 119-21 and is out of date. Second, the figure is now indexed from 2027 onward rather than scheduled to fall, which changes the urgency of transfers that were being rushed to beat a deadline. State estate and inheritance taxes are separate and are set state by state; the federal figures above say nothing about them.

Gift, sale, or a mixture of the two

Three routes carry a family business to the next generation, and they differ in who pays, who is taxed and what has to be documented.

On the gift side, the IRS defines a gift as “any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return,” and gifts are reported on Form 709, the United States Gift and Generation-Skipping Transfer Tax Return. The annual exclusion is per recipient rather than per donor: in the IRS’s words, “the annual exclusion applies to gifts to each donee. In other words, if you give each of your children $19,000 in 2026, the annual exclusion applies to each gift.” Gifts above the annual exclusion are not automatically taxed; they draw against the basic exclusion amount, which is why the $15,000,000 figure matters more than the $19,000 one for most business transfers.

On the sale side, a sale to a family member runs on the same machinery as a sale to a stranger. The IRS states that “the sale of a business usually is not a sale of one asset. Instead, all the assets of the business are sold,” each treated as sold separately, with “the residual method” required for any transfer of a group of assets constituting a trade or business. Section 1060 allocates the price across seven asset classes and both sides report it on Form 8594. If the price is paid over time, Publication 537 defines that as an installment sale, reported on Form 6252 under section 453, with one warning attached: depreciation recapture is not deferrable, and “you must report any depreciation recapture income in the year of sale, whether or not an installment payment was received that year.” Our guide to how to sell a small business works through the sale process end to end.

The mixed route is where a family transaction differs from an arm’s-length one. A sale at a price below fair market value is a sale for part of the consideration and a gift for the rest, because the IRS definition above turns on whether full consideration was received. That is not a reason to avoid it. It is a reason to have the value established properly before the paperwork is signed, since the size of the gift is the gap between the price and that value.

Valuing the business for a transfer

Whichever route you take, a number has to be defensible. A gift reported on Form 709 rests on a value. A sale to a child at a discount to market creates a gift measured against a value. A business passing at death is included in the estate at a value.

The foundational IRS guidance on valuing closely held stock is Revenue Ruling 59-60, and it is worth knowing by name because every valuation report in this field refers to it. For the standard itself, IRS Publication 561 (rev. December 2025) is current and plain: the fair market value of an interest in a closely held business “is the amount that a willing buyer would pay for the interest to a willing seller after consideration of all relevant factors.”

On method, the Internal Revenue Manual’s Business Valuation Guidelines state that “the three generally accepted valuation approaches are the asset-based approach, the market approach and the income approach” (IRM 4.48.4.2.3). The SBA’s own business guide puts the same three in reader’s English: the income approach “looks at projected revenue and accounts for potential risks,” the market approach “compares your business to other similar businesses that have recently sold,” and the assets approach “subtracts total business liabilities from the total value of all assets.”

Two things to specify when you commission the work. The first is the engagement type. NACVA’s Professional Standards distinguish a Valuation Engagement, which “results in a Conclusion of Value,” from a Calculation Engagement, which happens “when the client and member/credentialed designee agree to specific valuation approaches, methods, and the extent of selected procedures and results in a Calculated Value” and must be reported with a legend beginning “This Calculation Engagement did not include all the procedures required for a Conclusion of Value.” A calculated value is cheaper and says on its face that it is not the full engagement.

The second is what the person signing it holds. NACVA’s Certified Valuation Analyst, the AICPA’s Accredited in Business Valuation and the American Society of Appraisers’ Accredited Senior Appraiser are the credentials with published requirements behind them; what each demands is set out in our guide to exit planning consultants, and the valuation approaches themselves in how to value a small business. NACVA’s own standards add a caution worth carrying into a family conversation: “rules of thumb are acceptable as reasonableness checks, but should not be used as a stand-alone method.” The multiple your cousin heard at a trade show is not a valuation.

If the business passes at death instead

Two provisions of the Code exist specifically because a family business is not a liquid asset, and both are rules rather than recommendations.

Installment payment of estate tax, IRC section 6166. Where “the value of an interest in a closely held business … exceeds 35 percent of the adjusted gross estate,” an executor “may elect to pay part or all of the tax … in 2 or more (but not exceeding 10) equal installments,” with the first installment due within five years of the normal payment date. An interest in a closely held business for this purpose covers a proprietorship, a partnership in which the decedent held a 20 percent capital interest or which had 45 or fewer partners, and a corporation in which the decedent held 20 percent of the voting stock or which had 45 or fewer shareholders. A reduced interest rate applies to what the statute calls the two-percent portion, under section 6601(j).

Special-use valuation, IRC section 2032A. The section is headed “Valuation of certain farm, etc., real property” and allows an executor to elect to value qualifying real property at its value “for the use under which it qualifies” rather than at its highest and best use, subject to gross-estate percentage tests of 50 percent for real and personal property and 25 percent for real property. For 2026 the reduction in value that election can produce is capped at $1,460,000 by Rev. Proc. 2025-32. It is the provision that keeps a working farm or a business’s own premises from being valued as a development site.

Whether any particular estate qualifies for either of these is a question for that estate’s own attorney and CPA. Both elections have conditions and recapture rules that go well beyond what a general article can safely summarize.

Fairness among heirs, and the buy-sell that has to exist

The hardest problem in a family handover has no tax answer. One child works in the business and will run it. Another does not and never will. Treating them equally and treating them fairly are usually different transactions, and the difference has to be decided by the owner, in writing, while the owner is alive to explain it.

What can be said with a source behind it is what the paperwork has to settle. If more than one family member will hold an interest, the business needs a buy-sell agreement that names the triggers, says who may buy, sets the price mechanism, and says how the purchase is funded. Our guide to exit planning for partnerships covers those clauses in detail, and one point in it applies with particular force to families: in Connelly v. United States, 602 U.S. 257, decided June 6, 2024, the Supreme Court held unanimously that “a corporation’s contractual obligation to redeem shares is not necessarily a liability that reduces a corporation’s value for purposes of the federal estate tax.” The facts were two brothers, a small building-supply corporation, an agreement requiring the company to redeem a deceased brother’s shares, and company-owned life insurance bought to fund it. That is the standard family-corporation arrangement, and any agreement of that shape written before mid-2024 should be read by the family’s own counsel.

A related reason to write things down: an heir who is expected to buy in will often need a lender, and lenders have rules about who can be in the deal. If the purchase is financed by an SBA 7(a) loan as an Owner Buyout, SOP 50 10 8.1 requires at least one original owner to remain in place and guarantee the loan, and provides that “individuals not currently employed by the business may only acquire less than 50% of the total equity and may not become the largest direct or indirect shareholder.” A child who has never worked in the business is subject to that limit; a child already on the payroll is not. Deals that fail the test are processed as Initial Acquisitions, where the 10 percent equity injection cannot be reduced or eliminated.

Governance: what has to exist before the handover

If the business will be sold to an outsider rather than gifted, or if a family buyer needs financing, someone will examine the numbers. The SBA’s Quality of Earnings requirement, which applies to Business Expansion and Initial Acquisition transactions at a purchase price of $3 million or more from October 1, 2026, is the most specific published description of what that examination covers. The report “must identify and document all add-backs and adjustments to the seller’s reported earnings, including non-recurring revenue or expenses, above- or below-market owner compensation, related-party transactions, deferred maintenance, and accounting methodology differences between cash-basis and accrual-basis reporting,” and it “must assess the quality and sustainability of the business’s revenue base, including customer concentration risk, contract continuity, and the likelihood that existing revenue and margins will be maintained post-sale.”

Read that list as a to-do list. Family businesses accumulate exactly those items: a relative on the payroll at a rate nobody would pay a stranger, premises rented from a family trust, a maintenance program that has slipped, and a handful of customers who buy because they know the founder. None of them is wrong. All of them have to be identifiable in the books before a buyer or a lender finds them first.

The financial statements themselves are ranked. SBA SOP 50 10 8.1 sets the order of thoroughness as “(1) Audited Financial Statements, (2) Reviewed Financial Statements (Prepared to AICPA SSARS AR-C 90 standards), (3) CPA Compiled Financial Statements, and (4) Corporate Tax Returns,” and tells lenders that credit analysis “must primarily focus on the highest level of financial statements available.” A family business running on tax returns alone is at the bottom of that ladder, and moving up it takes more than one year of clean books.

The SBA’s own closing and selling guidance is blunt about documents: “you must prepare a sales agreement to sell your business officially,” and “an attorney should review it to make sure it’s accurate and comprehensive.” It names outright sales, gradual sales and lease arrangements as the transfer methods, and advises settling in advance how the business will be run before closing.

Who to bring in, and when

An estate attorney handles the transfer documents, the buy-sell agreement and the will or trust that sits behind them, and is the only person who can tell you how your state treats any of it. A CPA or enrolled agent files Form 709 for gifts, handles the sale side if there is one, and is the person to ask whether an election under section 6166 or 2032A is even in scope. A valuation credential holder produces the number the whole plan rests on, and a conclusion of value carries more weight than a calculated value if it is ever questioned. Where the business is large enough that the monthly numbers themselves are the problem, fractional CFO work is the right description of the fix rather than exit planning. Our directory lists CPA firms by state and city. Start the conversation earlier than feels necessary, because the governance items above take years rather than months, and a gifting program measured in annual exclusions takes years by design.

Frequently Asked Questions

Sources

14 links

• IRS Rev. Proc. 2025-32
• IRS: gift tax
• IRS: frequently asked questions on gift taxes
• IRS: sale of a business
• IRS Publication 537, Installment Sales
• IRS Publication 561, Determining the Value of Donated Property
• Internal Revenue Manual 4.48.4, Business Valuation Guidelines
• 26 U.S. Code section 6166, extension of time for payment of estate tax where estate consists largely of interest in closely held business
• 26 U.S. Code section 2032A, valuation of certain farm, etc., real property
• 26 U.S. Code section 1060, special allocation rules for certain asset acquisitions
• SBA SOP 50 10 8.1, effective October 1, 2026
• SBA: close or sell your business
• Supreme Court of the United States, Connelly v. United States, 602 U.S. 257 (2024)
• NACVA Professional Standards, effective June 1, 2023