Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use Pre-Exit Gifting to Reduce Tax Bills
Transcript
- Lucas: If you're a founder sitting on shares worth tens of millions before an IPO, there's a way to get those shares out of your estate — paying little to no gift tax — and still keep control. It's called pre-exit gifting, and it's one of the most underused tools in the liquidity playbook. Luna: I've heard of founders gifting shares to family, but doesn't the IRS hit you with a massive gift tax bill if the shares are worth a lot? Lucas: That's the key — the timing. You gift shares when the 409A valuation is still low, before the IPO pop. Let's say a founder has 1 million shares valued at $15 per share by a recent 409A. That's $15 million. You can gift up to the lifetime exemption — which is around $13.61 million per person in 2026 — and use your annual exclusion for the rest. No gift tax due. Luna: So you're moving millions out of your estate at a pre ipo valuation, and then the shares go public at, say, $50. The appreciation happens outside your estate. That's a huge tax saving. Lucas: Exactly. And you can do it through vehicles like a Grantor Retained Annuity Trust — a GRAT — or a Charitable Remainder Trust. With a GRAT, you gift shares to a trust, keep an annuity stream for a set number of years, and any remaining value passes to beneficiaries tax-free. If the stock appreciates faster than the IRS assumed interest rate — currently around 4.6 percent — the excess goes to your kids or a trust with zero gift tax. Luna: That almost sounds too good to be true. What's the catch? Lucas: The main risk is that the stock doesn't appreciate enough to beat the IRS rate. If it falls, you get your shares back, but you've wasted the legal fees and the trust setup costs. There's also the 'step transaction' doctrine — if the IRS thinks your gift was too close to the IPO, they might revalue the shares at the IPO price and hit you with a tax bill. You need to leave a gap of at least six months between the gift and the exit. Luna: Speaking of timing — look at current market volatility. NVIDIA is down 7.7 percent in the last five days, Shopify up 8.2 percent. A founder who gifted NVIDIA shares a week ago would have locked in a lower valuation for gift tax purposes, but the shares are now worth less. That cuts both ways. Lucas: Right. That's why the best time to gift is when the 409A is already low — not after a big run-up. But if you're a founder in a volatile stock, you could gift when the valuation dips, ride the recovery, and let the appreciation pass tax-free. The key is to have a clear valuation report and a defensible timeline. Luna: And this isn't just for the ultra-wealthy. Even a founder with a $10 million pre-money valuation can use annual exclusions — $18,000 per recipient in 2026 — to move shares to kids or a trust each year, slowly reducing their estate. Lucas: That's a great point. And there's another structure: the Charitable Remainder Unitrust, or CRUT. You donate shares to a charitable trust, get an immediate tax deduction for the present value of the charity's remainder interest, and then the trust sells the shares tax-free — no capital gains. You receive a stream of income for life or a term of years, and the remainder goes to charity. It's a way to diversify a concentrated position without triggering a huge tax event. Luna: Let's make this concrete. Say a founder has $15 million in shares with a cost basis near zero. If they sell, they'd owe roughly 23.8 percent federal capital gains tax — that's $3.57 million. If they instead put those shares into a CRUT, they get a deduction worth maybe $4 to $5 million, defer all gains, and receive annual income. Plus, the charity gets the rest. Lucas: And that deduction can offset other income in the year of the gift. It's especially powerful if the founder has a big liquidity event that year and needs to reduce their taxable income. One caveat: the trust has to pay out at least 5 percent of its assets annually, so you need to ensure the trust generates enough income or growth to sustain that. Luna: I've also heard of founders using a 'gift and leaseback' — they gift real estate or equipment to a trust and then lease it back for their business. That shifts income to the trust, which is taxed at lower rates. But that's more for established companies, not pre ipo startups. Lucas: Absolutely. For pre ipo, the most common vehicles are GRATs, CRUTs, and direct gifting to a donor-advised fund. The donor-advised fund is simpler: you contribute shares, get an immediate deduction, and the fund sells them tax-free. You can then recommend grants to charities over time. It's like a personal foundation without the administrative hassle. Luna: And here's something I want to flag: if you're listening and you have a founder friend who's about to IPO, tell them to talk to a tax lawyer now, not after the lockup expires. Once the stock is public and liquid, the valuation is set. You lose the ability to lock in a low 409A. Lucas: Exactly. The window is before the S-1 filing, when the 409A is still the most recent valuation. After that, the IRS will almost certainly argue that the fair market value is the IPO price. So the planning has to happen early. Luna: One more thing — there's also the 'minority discount' and 'lack of marketability discount' that can further reduce the gift tax value of privately held shares. A founder might get a 20 to 30 percent discount on the 409A value for gift tax purposes, making the gift even cheaper. Lucas: Right. The IRS has been cracking down on aggressive discounts, but if you have a proper appraisal, they're still valid. The key is to use a qualified appraiser and document everything. Luna: You know, this show is ad-free and listener-supported. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these episodes. Lucas: Yeah, it's a small group that keeps it going. If these conversations are useful for what you're building or running, that's the way to keep them coming. Luna: Alright, back to gifting. Let's talk about the 'step transaction' doctrine in a bit more detail. Lucas, you mentioned leaving a gap of at least six months. But what if the IPO happens sooner than expected? Lucas: That's the nightmare scenario. If you gift shares in January and the company files for IPO in March, the IRS could look at the two events as one integrated plan. They'd revalue the gifted shares at the IPO price and assess gift tax on the difference. Some tax attorneys recommend waiting until after the first public filing — or at least until the company has a clear timeline — to avoid integration risk. Luna: And there's another strategy: using a 'freeze' partnership or LLC. You contribute shares to a family LLC, take a preferred interest that's worth a fixed amount, and give the common interest to your kids. The preferred interest stays in your estate, but the common gets all the future appreciation. That's more complex, but it works. Lucas: That's the classic 'estate freeze' — very popular in the 1990s, until Congress passed Section 2703 of the Internal Revenue Code to limit it. Now you need a bona fide business purpose and the valuation has to be done correctly. But it's still viable for operating companies, not just passive holdings. Luna: So the takeaway for founders is: if you're planning an exit in the next 12 to 18 months, sit down with a tax advisor and a trusts and estates attorney. Look at your 409A, your family situation, and your charitable goals. The structures are there, but they need time to set up. Lucas: And remember, these aren't loopholes — they're congressionally sanctioned incentives for charitable giving and estate planning. The key is to act while the shares are still private. Once they're public, the train has left the station. Luna: I think that's a good note to end on. Next episode, we'll look at another quiet liquidity tool: the 'pre ipo stock loan' — where founders borrow against their shares without selling. Lucas: Looking forward to it. Until then, keep building.