Estate planning with LLCs, the tax angle

An LLC that holds real estate is a remarkably efficient vehicle for passing wealth to the next generation, because it lets you transfer the property as fractional interests rather than as the building itself, and fractional interests are worth less for tax purposes than the underlying dirt. That single feature, plus the basis step-up at death, is why family real estate so often sits in an LLC. But the strategy has a trap that catches the overeager: gift too aggressively and you can hand your heirs a larger income-tax bill than the estate tax you saved. This is the tax lens; the trust structures that pair with it live on the trusts and LLCs page.

Where the estate tax bar sits now

Start with the threshold, because it decides whether estate tax is even your problem. The 2025 tax law made the federal estate and gift tax exemption permanent at $15 million per person, $30 million per married couple, effective in 2026. That is a very high bar, and it removed the looming sunset that had been driving urgent planning. For most families, federal estate tax is simply not the issue, which changes the whole calculus toward income-tax planning, especially the basis step-up. For families above the exemption, or in a state with its own lower estate-tax threshold, the transfer strategies below do real work.

The federal estate and gift exemption is now a permanent $15 million per person, so for most families the planning goal shifts from dodging estate tax to capturing the basis step-up.

The valuation discount, the LLC’s signature move

Here is what makes the LLC special for transfers. If you own a building worth $1,000,000 and give a child a 10% slice of the building, that gift is worth $100,000. But if the building sits in an LLC and you give a child a 10% membership interest, that interest is worth less than $100,000, because a minority interest in an LLC cannot control the entity, cannot force a sale or a distribution, and cannot be readily sold to an outsider.

Two discounts capture that. A minority interest, or lack of control, discount reflects the powerlessness of a non-controlling owner, commonly in the range of 10% to 30%. A lack of marketability discount reflects how hard the interest is to sell, commonly 15% to 50%. Combined, they can approach a 40% to 50% reduction in the taxable value of the transferred interest. So gifting an LLC interest moves more real value out of your estate per dollar of exemption used than gifting the property directly.

Gifting a minority LLC interest instead of the property itself can cut the taxable value 40% or more through lack-of-control and lack-of-marketability discounts.

Steady transfer with the annual exclusion

Discounts pair with the annual gift exclusion to move value out year after year without touching your lifetime exemption. In 2026 you can give $19,000 per recipient per year free of gift tax, $38,000 for a married couple splitting gifts. Gift discounted LLC interests to several children and grandchildren each year, and a couple can move a substantial slice of a property out of their estate annually, with the discount stretching each year’s exclusion further. Do it long enough and a large property migrates to the next generation with little or no exemption consumed, and all the future appreciation happens in the heirs’ hands, outside your taxable estate.

The trap: gifting away the step-up

Now the seam that catches people, and it is a tension between two different taxes. When you gift an asset during your life, the recipient takes your basis, carryover basis. Your low, heavily depreciated basis becomes their low basis, so when they sell, they owe income tax on all that built-in gain. When instead an asset passes at your death, your heirs get a stepped-up basis to fair market value under Section 1014, and the built-in gain, and all the depreciation recapture riding with it, disappears.

So aggressive lifetime gifting to avoid estate tax can cost your heirs a large income-tax bill they would have avoided by inheriting. With the exemption now at $15 million, most families are not being driven by estate tax, which means the step-up usually wins: holding appreciated, depreciated real estate until death, so the gain vanishes, beats gifting it away and saddling heirs with carryover basis. The right answer flips above the exemption, where estate tax at 40% can outweigh the lost step-up. Knowing which regime you are in is the whole game.

Gifting during life passes your low basis to your heirs; holding until death steps it up and erases the gain, so below the exemption the step-up usually beats gifting.

The bottom line

• An LLC lets you transfer real estate as fractional interests worth less than the underlying property.
• Minority and marketability discounts can cut the taxable value of a gifted interest 40% or more.
• The annual exclusion ($19,000 per recipient in 2026) moves discounted interests out steadily.
• Gifting passes your low basis to heirs; death steps the basis up and erases the gain.
• With a $15 million exemption, the step-up usually beats gifting for most families; above it, the math can flip.

For the trust structures that pair with this, see the trusts and LLCs page. For the death-basis mechanic in partnerships, read the 754 election. For the full picture, start at the entity and LLC tax strategies hub.

Last verified August 2026.