Estate Planning Before Selling a Business in California: Timing, Trusts and Taxes

By Eric Ridley, attorney, Ridley Law. Updated October 2026.

Estate size this page covers: founders and owners whose sale will put them over $15 million single or $30 million married, where gifts before the deal move the growth out of the estate. Owners below that line still need the income tax and residency sections, because California’s 13.3% applies to every dollar of gain. Founders headed past $1 billion should read the Prop 40 section.

When should estate planning start before selling a business?

Planning should start before the sale is a “virtual certainty,” the Tax Court’s phrase in Estate of Hoensheid (2023), and in practice that means 12 months or more before a letter of intent, when an appraisal can still reflect the risk that no sale happens.

Two separate rules work against a late gift. The first is valuation: a gift is valued at the price a willing buyer and seller would agree on, “both having reasonable knowledge of relevant facts” (Treas. Reg. § 25.2512-1), and once a buyer has signed a letter of intent at a stated price, that price is a relevant fact. The second is the assignment-of-income doctrine: if the right to the sale proceeds has already become fixed when the shares are given away, the gain is taxed to the giver even though someone else sells. The valuation rule applies to every gift. The income rule matters most for gifts to charities, charitable remainder trusts and non-grantor trusts, because a grantor trust’s gain is taxed to the founder anyway (IRC § 671).

What the cases say about gifts made close to a sale

Estate of Hoensheid v. Commissioner, T.C. Memo. 2023-34. Three brothers signed a nonbinding letter of intent on April 23, 2015, to sell their family company for $107 million. One brother’s advisers told him in writing that the gift to a donor-advised fund had to be completed before a purchase agreement was executed. He wanted to wait until he was “99% sure” the sale would close. He gave 1,380 shares on July 13, and the sale closed July 15. The court held that “a donor must bear at least some risk at the time of contribution that the sale will not close,” that waiting until two days before closing eliminated that risk, and that the gain was his. The $3,282,511 charitable deduction was also denied, because the appraiser wasn’t a qualified appraiser and the appraisal didn’t substantially comply with the rules. The court rejected the penalty because he had relied on professional advice. The purchase agreement hadn’t been signed at the time of the gift, so a gift before signing isn’t automatically safe.

Ferguson v. Commissioner (9th Cir. 1999) 174 F.3d 997. The company had signed a merger agreement and a tender offer was under way. The Ninth Circuit, which covers California, affirmed that the stock had “ripened” into a fixed right to cash once more than half the shares had been tendered, and the family’s gifts of stock to charities were completed nine days later. The gain was theirs.

Rauenhorst v. Commissioner (2002) 119 T.C. 157. The taxpayers gave stock warrants to charities after a buyer had signed a letter of intent, and won, because the IRS’s own Rev. Rul. 78-197 says it will tax the donor only if the charity is legally bound to sell, and the court held the IRS to that ruling. Don’t build a plan on it: in Hoensheid the Tax Court repeated, quoting its 2020 Dickinson decision, that it “has not adopted Rev. Rul. 78-197 as the test,” and looked at whether the sale was a virtual certainty.

Techniques that work before a sale

1. Gifts and sales to a grantor trust

   Nonvoting shares given or sold to an irrevocable grantor trust are valued at an appraisal done before any buyer appears, and everything the shares are worth at closing above that value sits outside the estate. The founder still owes the income tax on the trust’s share of the gain (IRC § 671), and paying it isn’t a gift to the beneficiaries (Rev. Rul. 2004-64), which moves more value out of the estate. The trade-off is basis: the trust takes the founder’s basis (IRC § 1015) and gives up the step-up the shares would have received at death (IRC § 1014).

2. GRATs funded before the letter of intent

   A grantor retained annuity trust pays the founder a fixed annuity for a term and passes what’s left to the family. Under Walton v. Commissioner (2000) 115 T.C. 589, the annuity can be valued for a fixed term, which lets the taxable gift be close to zero. Drafting the annuity as a percentage of the value “as finally determined for federal tax purposes” (Treas. Reg. § 25.2702-3(b)(1)(ii)(B)) means an IRS revaluation changes the annuity, not the gift. If the founder dies during the term, the part of the trust needed to pay the annuity comes back into the estate (Treas. Reg. § 20.2036-1(c)(2)), so short terms are common.

3. QSBS stacking with completed-gift trusts

   If the company is a C corporation whose stock qualifies under IRC § 1202, each taxpayer gets a separate exclusion limit of the greater of a dollar cap ($10 million for stock acquired on or before July 4, 2025, when Pub. L. 119-21 was enacted, and $15 million for stock acquired after) or 10 times basis. Gifted stock keeps its status (IRC § 1202(h)), so gifts to non-grantor trusts for children can multiply the federal exclusion. California doesn’t follow § 1202 at all (R&TC § 18152). See QSBS, section 1202 and California.

4. Charitable remainder trusts for low-basis stock

   A charitable remainder trust pays the founder or family an annuity or unitrust amount for life or a term of years and leaves the rest to charity. The trust itself pays no income tax when it sells (IRC § 664(c)(1)), so the gain is taxed only as payments come out. The trust has to own the shares while the sale is still uncertain, for the reasons in Hoensheid and Ferguson. Treasury has made one version, a CRAT that buys a single premium immediate annuity, a listed transaction (Treas. Reg. § 1.6011-15, T.D. 10051, effective July 9, 2026). See charitable remainder trusts in California.

5. Installment sales

   Taking part of the price as a note spreads the gain over the years payments arrive (IRC § 453), but California treats installment gain on a sale made while you were a resident as California income even after you move (FTB Publication 1100). See installment sales of a California business.

Cases won and lost

Worked example: the same gift, before and after the letter of intent

A hypothetical California founder owns all the stock of a C corporation that will sell for $60 million. His basis is $1 million, the shares are his separate property, and the stock isn’t QSBS. He gives 30% of the shares, as nonvoting stock, to an irrevocable grantor trust for his children. In the first version he makes the gift more than a year before any buyer appears, when an appraiser values the company at $40 million and applies a 30% discount for a minority, nonvoting interest. In the second he makes the gift after signing a letter of intent at $60 million.

The early gift uses $8.4 million of exemption to move $18 million, and $9.6 million of value leaves the estate untaxed, which is $3.84 million of estate tax at 40%. The late gift uses the full $15 million exemption and $1.2 million of gift tax to move the same $18 million. In both versions the founder pays the income tax on the trust’s share of the gain, which removes about $6.57 million more from his estate without a gift. None of this changes the income tax on the sale itself.

What changes in California

• 13.3% on the whole gain. California’s top bracket is 12.3% plus a 1% surcharge on income over $1 million (R&TC § 17043), and it “does not have a lower rate for capital gains” (FTB).
• No QSBS. Section 1202 doesn’t apply for California (R&TC § 18152), so a federally excluded gain is fully taxed here.
• Residency is decided on the facts, not the moving date. A resident includes everyone in California for other than a temporary or transitory purpose and everyone domiciled here who’s away temporarily (R&TC § 17014), and residents are taxed on all income (R&TC § 17041). FTB Publication 1031 looks at where you have your closest connections. In Bracamonte, owners rented a Nevada apartment, got Nevada licenses and registered to vote there in February 2008, spent 90 days in California and 28 in Nevada before the July closing, and were held to be California residents on the sale date.
• Moving after the deal is signed rarely helps. A nonresident is taxed only on California-source income (R&TC § 17951), allocated under FTB rules (R&TC § 17954), and a nonresident’s gain on stock generally isn’t California income unless the stock has a business situs here (R&TC § 17952). The investment-securities exception in R&TC § 17955 doesn’t reach holdings tied to a California business the nonresident owns (§ 17955(b)). All of that helps only if the move comes first and is real. Installment payments on a sale made while you were a resident stay California income after you leave (FTB Publication 1100), and an FTB legal ruling treats income that accrued while you were a resident as California income even when it arrives after the move (FTB Legal Ruling 1998-3, which applied an accrual statute since removed from the code). A move made between signing and closing invites the FTB to make both arguments.
• Trusts. A non-grantor trust is taxed in California if a trustee or a noncontingent beneficiary lives here (R&TC § 17742), and California-source income is taxed regardless of where the trustees live (Steuer). Incomplete-gift non-grantor trusts, the Nevada and Delaware “ING” trusts once used to avoid state tax on a sale, are taxed to the California grantor for years beginning on or after January 1, 2023, with a narrow exception for trusts that, among other conditions, distribute 90% or more of their income to charity (R&TC § 17082).
• Community property. If the founder is married, the stock is often community property. A spouse can’t give away community personal property without the other spouse’s written consent (Fam. Code § 1100(b)), and a change from community to separate property needs a written transmutation (Fam. Code § 852). Holding community stock until the first death gets both halves a new basis (IRC § 1014(b)(6)), which a gift gives up. See community property step-up.

Prop 40 and founders above $1 billion

Proposition 40, the 2026 Billionaire Tax Act, is on the November 3, 2026 ballot. As written, it would impose a one-time tax of 5% of net worth on people who were California residents on January 1, 2026, with net worth of $1 billion or more measured on December 31, 2026. Nothing on this page takes a position on it. For a founder near that line, the measure’s text includes these provisions:

• Residency is fixed as of January 1, 2026, so a move made now doesn’t change who it covers.
• Grantor trusts count in the founder’s net worth, and property given to non-grantor trusts counts too: all of it for 2026 transfers and 75% for 2025 transfers.
• Property worth more than $1 million transferred for less than fair market value after October 15, 2025, counts in the transferor’s net worth.
• A private company can’t be valued below a funding round or sale within two years of the valuation date unless the taxpayer shows by clear and convincing evidence that the round overstates value.
• The tax can be paid in five annual installments, with a 7.5% yearly charge on the unpaid balance.

See Prop 40, the California billionaire tax.

What works and what fails

Who this is for

Founders, family business owners and early employees with large stakes who expect a sale, recapitalization or IPO in the next few years, and whose estate after the sale will be over the federal exemption or whose gain will be large enough for California’s rate and residency rules to matter. The work overlaps with succession planning: see business succession planning in California, the S corporation owner with no succession plan, how to sell a small business in California and the ultra high net worth planning overview. For each technique side by side, see estate planning strategies compared.

Working with Ridley Law

I work alongside your CPA and, where the matter calls for it, co-counsel. Work at this level is built for each family and quoted in writing before any drafting starts. The first call is free and runs 30 minutes, by phone or Zoom, and the earlier it happens relative to a letter of intent, the more there is to work with.

Book my 30-minute call or call 805-244-5291.

Frequently asked questions

How far ahead of a sale should a business owner start estate planning?

At least 12 months before a letter of intent is the safer target. Gifts and trust funding made before any buyer appears can be valued at a pre-deal appraisal, and the sale isn’t yet close to certain, which is the line the Tax Court drew in Estate of Hoensheid (2023).

Can I give shares to my children after signing a letter of intent?

You can, but the gift will likely be valued close to the deal price, because a gift is valued with “reasonable knowledge of relevant facts” (Treas. Reg. § 25.2512-1). That uses much more exemption than a gift made before a buyer appeared.

What is the anticipatory assignment of income doctrine?

It taxes income to the person who earned the right to it, even if that person gives the property away before the money arrives. In a business sale, it means a gift of shares made after the sale is effectively certain leaves the gain with the donor (Ferguson, 9th Cir. 1999; Hoensheid, 2023).

Does California follow the federal QSBS exclusion?

No. R&TC § 18152 says § 1202 doesn’t apply, so California taxes the full gain on qualified small business stock.

If I move out of California before the sale closes, do I avoid California tax?

Only if the move is real and comes first. In Appeal of Bracamonte (2021), owners who set up in Nevada about five months before closing were still California residents on the sale date and owed $1,592,648 more.

Does a charitable remainder trust avoid the tax on a business sale?

It defers it. The trust pays no income tax when it sells (IRC § 664(c)(1)), and the gain is taxed to the founder as payments come out over the years. The trust has to receive the shares before the sale is a virtual certainty.