Most conversations about pre-IPO shares focus on when to buy or sell. Far fewer focus on something that can matter just as much to long-term wealth: how to move those shares to family members, trusts, or other structures in a way that minimizes gift and estate tax. For holders of appreciated private stock, the window between grant or purchase and a liquidity event is often the best — and sometimes only — time to execute these strategies effectively.
Why pre-IPO timing creates an unusual planning opportunity
Gift and estate tax in the United States is generally assessed on the fair market value of an asset at the time of transfer. For a publicly traded stock, fair market value is the market price on the date of transfer — straightforward and difficult to argue around. For a private company share, fair market value is a determined figure, typically tied to the most recent 409A appraisal or, in some cases, an independent valuation performed specifically for the transfer.
A 409A appraisal — the same third-party valuation used to set exercise prices for employee stock options — applies discounts that public market prices do not: a discount for lack of marketability (DLOM), reflecting the difficulty of selling a private share, and sometimes a discount for lack of control (DLOC), reflecting the fact that a minority holder cannot force a liquidity event. These discounts can reduce the appraised value of a private share to materially below what a secondary buyer would actually pay for it.
That gap is the planning opportunity. If you transfer shares at a 409A-based valuation of, say, $40 per share, and the company later goes public or is acquired at $120 per share, the gift or estate tax you paid was based on $40. The additional $80 of appreciation belongs to the recipient — not to your taxable estate.
The annual exclusion and lifetime exemption: a quick map
Before getting into structures, it helps to have a clear picture of the relevant tax thresholds. The federal gift and estate tax system uses two main levers.
For holders of significant private share positions, the practical implication is that transferring shares now — while the higher exemption is available and while the 409A is still below the expected public valuation — maximizes the tax efficiency of the transfer.
Common structures for transferring pre-IPO shares
Outright gift to a family member
The simplest approach is a direct transfer of shares to a spouse, child, or other individual. The recipient takes the shares at your original cost basis (a carryover basis), meaning any built-in gain is not eliminated — it is deferred until the recipient sells. The gift tax value is based on fair market value at the time of transfer, typically the 409A. This works well for smaller positions or transfers within the annual exclusion amount.
Irrevocable trust (including SLATs and GRATs)
More sophisticated planning often uses an irrevocable trust. A Spousal Lifetime Access Trust (SLAT) allows a married individual to transfer assets out of their taxable estate while their spouse retains access to distributions during their lifetime. A Grantor Retained Annuity Trust (GRAT) allows the donor to transfer future appreciation to heirs at minimal gift tax cost by structuring the trust to pay back the original principal plus a modest IRS-set interest rate (the Section 7520 rate) to the donor over a fixed term. If the assets appreciate above that hurdle rate, the excess passes to heirs gift-tax-free.
GRATs are particularly useful for pre-IPO shares because the bet is explicit: if the company goes public or is acquired at a valuation significantly above the 409A, the appreciation above the 7520 rate passes to the next generation without additional gift or estate tax. The downside is that if the company fails or the value does not grow, the GRAT simply terminates and the assets return to the donor — a feature sometimes called a 'zeroed-out' GRAT.
Intentionally Defective Grantor Trust (IDGT)
An IDGT is a trust that is outside the donor's taxable estate for estate tax purposes but is treated as owned by the donor for income tax purposes. The practical benefit: the donor pays income taxes on trust income and gains, which is itself a tax-free gift (because those payments reduce the donor's estate without being treated as additional gifts). Pre-IPO shares sold to an IDGT in exchange for a promissory note — a technique called an installment sale to an IDGT — can freeze the estate tax value of the shares at the 409A while allowing all future appreciation to accumulate inside the trust for beneficiaries.
What to watch for when the shares are held in an SPV
Many secondary buyers hold pre-IPO shares through a special purpose vehicle (SPV) — a limited liability company created specifically to hold the position. If you are considering a gift or estate planning transfer and your shares are already inside an SPV, the mechanics are slightly different from transferring shares directly.
You are not transferring shares in the underlying company — you are transferring membership interests in the SPV. Membership interests in a closely held LLC can often be valued at a discount to the underlying net asset value (the shares inside), because the LLC interest carries its own lack-of-control and lack-of-marketability characteristics. This additional layer of discount can reduce the gift tax value of the transfer further. However, it also introduces complexity: the operating agreement of the SPV may restrict transfers of membership interests, and the manager of the SPV (often the platform or deal sponsor) may have rights that affect your ability to transfer freely.
Before attempting to transfer SPV interests as part of an estate plan, review the operating agreement carefully and confirm whether the SPV manager's consent is required. Attempting a transfer without that consent can result in the transfer being void — or, worse, triggering the ROFR provisions of the underlying company.
- Confirm whether the SPV operating agreement permits transfers of membership interests to trusts or family members, and whether manager consent is required.
- Obtain an independent valuation of the SPV membership interest if you intend to rely on discounts beyond the 409A for gift tax purposes — the IRS can challenge unsupported discount claims.
- Coordinate the timing of any transfer with the status of the underlying company: transferring just before a publicly announced funding round or acquisition may be scrutinized more closely by the IRS.
- If your pre-IPO shares qualify for QSBS treatment under Section 1202, confirm whether a gift or trust transfer preserves that treatment for the recipient — the rules on QSBS transferability are specific and worth a careful read with your tax advisor.
The role of a secondary sale in your broader estate plan
Not every holder of pre-IPO shares wants to give them away before a liquidity event. For many, the right approach is a partial secondary sale now — to diversify concentration risk and generate liquidity — combined with a gift or trust transfer of the remaining position. Selling a portion locks in some value at today's secondary price. Gifting the remainder transfers the upside to the next generation at a potentially lower tax cost.
The right balance depends on your overall estate size, the specific company's risk profile, and how much of the position you can afford to hold illiquid for another two to five years. These are decisions that benefit from coordination between a qualified estate planning attorney and a CPA who understands private company equity — not tools that a secondary marketplace can replace.
What we can do is help you understand the secondary market value of your position, structure a clean transfer through templated SPV documents, and handle the ROFR process efficiently if you decide a partial sale is part of your plan. If you hold pre-IPO shares in one of our 28 listed issuers and want to explore current secondary pricing, our seller intake process is the right starting point.