Estate Planning with
Concentrated Stock

The 2026 estate tax exemption sunset creates a closing window

The federal estate tax exemption is scheduled to drop from approximately $13.61 million per individual ($27.22 million for married couples) to roughly $7 million per individual ($14 million for couples) effective January 1, 2026. This is the single largest scheduled change in estate tax law in a generation, and it directly affects every investor holding concentrated stock.

If your net worth — including your concentrated stock position — exceeds the new $7M threshold (or $14M for couples), the excess will be subject to a 40% federal estate tax at death. For a tech executive holding $15M in company stock, the difference between the 2025 and 2026 exemptions could mean an additional $2.6M in estate tax ($15M - $7M = $8M × 40% = $3.2M, vs. $15M - $13.61M = $1.39M × 40% = $556K). That's a $2.6M cost of inaction.

Grantor Retained Annuity Trusts — transfer appreciation without gift tax

A Grantor Retained Annuity Trust (GRAT) is an irrevocable trust under IRC §2702 that allows you to transfer the future appreciation of assets to your beneficiaries with minimal or zero gift tax. You contribute assets (such as concentrated stock) to the trust, and the trust pays you back an annuity over a set term (typically 2–3 years). If the assets appreciate faster than the §7520 hurdle rate during the term, the excess passes to your beneficiaries tax-free. If the assets don't outperform the hurdle rate, the assets return to you and you've lost nothing except the legal costs of setting up the trust.

The §7520 rate (the 'hurdle rate' for GRATs) is published monthly by the IRS. As of early 2026, the rate is approximately 5.4%. A lower §7520 rate makes GRATs more effective because less appreciation is needed to create a tax-free remainder. GRATs are especially powerful for volatile, high-growth stocks — exactly the kind of concentrated positions that founders and tech executives hold.

IRC §1014 — the most powerful (and most misunderstood) estate planning tool

Under IRC §1014, when you die, the cost basis of your assets is 'stepped up' to their fair market value at the date of death. This means the entire unrealized capital gain accumulated during your lifetime is permanently eliminated — not deferred, eliminated. Your heirs inherit the stock at the current market price and can sell it immediately with zero capital gains tax.

For concentrated stock with a very low cost basis, the step-up can eliminate hundreds of thousands or millions in capital gains. Consider an investor who bought $100K of stock that's now worth $5M. If they sell during their lifetime, they owe approximately $1.17M in federal capital gains tax ($4.9M × 23.8%). If they hold until death, their heirs receive the stock with a $5M basis and owe $0 in capital gains tax.

The step-up in basis creates a powerful argument for never selling highly appreciated stock — instead, use strategies that generate income or liquidity without triggering a sale (§721 SPV income, securities-backed lending) and let the step-up eliminate the gain at death. However, this strategy only works if (1) the estate tax doesn't consume more than the capital gains tax savings, and (2) you can afford to hold the concentrated position without selling.

Dynasty trusts, family LPs, and irrevocable life insurance trusts

Beyond GRATs and CRTs, several other estate planning vehicles are particularly useful for concentrated stock positions.

Family Limited Partnerships deserve special attention for concentrated stock holders. By contributing stock to an FLP and gifting limited partnership interests to heirs, you can transfer wealth at a discount — typically 15–30% below the market value of the underlying stock — because limited partners lack control and marketability. The IRS has challenged aggressive discounts, but courts have consistently upheld reasonable discounts in properly structured FLPs. The §721 SPV model can integrate with FLP structures: contribute stock to the SPV, then transfer SPV partnership interests to the FLP for discounted gifting.

Estate Planning for Concentrated Stock — Answered

What is a zeroed-out GRAT?

A zeroed-out GRAT is structured so that the present value of the annuity payments back to the grantor equals (or nearly equals) the value of the assets contributed. This means the gift tax value of the remainder interest is approximately $0 — you've used zero lifetime exemption. If the assets appreciate faster than the §7520 hurdle rate during the GRAT term, the excess passes to beneficiaries tax-free. If they don't, everything comes back to you. It's a heads-you-win, tails-you-don't-lose structure.

How does the step-up in basis work with concentrated stock?

Under IRC §1014, when you die, your concentrated stock's cost basis resets to its fair market value on the date of death. If you bought stock at $10/share and it's worth $500/share at death, your heirs inherit it with a $500/share basis. They can sell immediately and owe $0 in capital gains tax. The entire $490/share gain accumulated during your lifetime is permanently eliminated — not deferred.

What changes in 2026 for estate taxes?

The TCJA doubled the estate tax exemption starting in 2018, but this provision sunsets after December 31, 2025. The exemption is projected to drop from approximately $13.61 million per person (~$27.22M for married couples) to roughly $7 million per person (~$14M for couples) in 2026. The estate tax rate remains 40%. For investors with concentrated stock pushing their net worth above the new threshold, this creates urgency to implement GRATs, irrevocable trusts, and strategic gifts before the exemption drops.

Can I use a §721 SPV partnership interest in estate planning?

Yes. A §721 SPV partnership interest can be: (1) contributed to a GRAT — income from the SPV funds the annuity payments; (2) gifted to an irrevocable trust or FLP at a potential valuation discount (limited partnership interests typically receive 15–30% discounts for lack of control and marketability); (3) held until death for a step-up in basis under §1014. The partnership structure adds flexibility that direct stock ownership doesn't provide.

What is the §7520 rate and why does it matter for GRATs?

The §7520 rate is the assumed rate of return the IRS uses to value annuity payments for gift and estate tax purposes. It's published monthly and is based on 120% of the mid-term applicable federal rate (AFR). As of early 2026, the rate is approximately 5.4%. For GRATs, this is the 'hurdle rate' — your assets must appreciate faster than this rate for the GRAT to transfer wealth tax-free. A lower §7520 rate means a lower hurdle, making GRATs more effective.

Should I sell my concentrated stock to pay estate taxes, or use other strategies?

Selling concentrated stock to pay estate taxes is the worst-case scenario — you pay both capital gains tax on the sale and estate tax on the remaining value. Better approaches: (1) Use an ILIT (Irrevocable Life Insurance Trust) to fund life insurance outside the estate — proceeds pay the estate tax without touching the stock. (2) Elect to pay estate tax in installments under IRC §6166 if the stock qualifies as a 'closely held business interest.' (3) Plan proactively with GRATs and gifting to reduce the taxable estate below the exemption.