Closely held business owners face unique set challenges and opportunities, especially as we approach the anticipated sunset of current estate tax exemptions in January 2026. It’s imperative for business owners to consider their structure and succession plans to ensure continuity of management, minimal tax implications, and asset protection.

Let’s take a practical look at how to organize your business with the estate tax changes in mind, making sure the wealth you’ve worked so hard to build continues to support your family for many years to come.

Here are 8 essential steps to consider:

Step 1: Define the Purpose of Your Business
The first step in considering a restructuring of business entity type or ownership is to consider what the end game is for your business.  Do you have a family member or members who will take over and continue to operate the business?  This involves transferring your business knowledge, building relationships and possibly even creating training programs to prepare the next generation of leadership. Do you plan to sell to a competitor, private equity, or current management team?  Each of these options could lead to different planning strategies.

Step 2: Consult Professionals
Seek advice from estate planning attorneys, accountants, and wealth advisors who are well-versed in business and tax planning. They can provide personalized advice based on your full story and unique situation and the latest tax laws. They can also help you better understand what is officially considered part of your estate. These professionals will help you understand how the goals you devised in Step 1 can be achieved without conflict or damage to your family’s financial success.

Step 3: Understand the Implications of the Estate Tax Sunset
The estate exemption being reduced by half at the end of 2025, assuming no congressional intervention, is a highly important consideration in your planning. A highly valuable illiquid asset (your business) can create tax and liquidity issues if not properly structured.  Awareness and understanding are keys to successful planning; ensure you are well-informed of the legislative landscape and its potential impact on your estate.

Step 4: Assess/ Reevaluate Your Current Business and Estate Structure
Review your current business and estate structure with your advisors. This involves evaluating how your business is organized (e.g., LLC, S-Corp, Partnership), your current estate plan, how your assets are titled; and how your business structure fits with your personal wealth goals. How do you plan to pass your business on to the family? Changing your structure could lead to significant tax savings and better protect your assets.

Step 5: Explore Gifting Strategies and Trust Options
Consider making gifts to your family or into a trust now, while the tax-free limits are higher. Gifting shares of your business to heirs or into a trust can be a powerful way to transfer wealth now and reduce your overall taxable estate later.

Trusts can play a pivotal role in estate planning for business owners. By transferring business interests into a trust, you can provide for your heirs while potentially reducing estate taxes and offering protection against creditors. There are various trusts available, such as Grantor Retained Annuity Trusts (GRATs), Spousal Lifetime Access Trusts (SLATs) and Irrevocable Life Insurance Trusts (ILITs), each with its own benefits and considerations.

Step 6: Establish the Value of Your Business
Business valuation discounts can play a significant role in estate planning when it comes to gifting interests in closely held businesses to family members or trusts. These discounts are often applied to account for the lack of marketability and control associated with the ownership interest being transferred.  With the estate tax exemption decreasing from approximately $13.61MM per person and $27.22MM per married couple to around $6.8MM per person and $13.61MM per married couple at the end of 2025, it’s important to consider taking assets with great potential for appreciation and putting them in trust. As it applies to your company, you could get a current valuation of the company, gift a minority interest to a trust and take a lack of marketability discount thereby maximizing the eventual value of the gift and protecting a substantial amount from eventual estate taxes.

Business valuation discounts can help reduce the overall value of the assets being transferred, potentially lowering gift and estate tax liabilities. However, it is important to note that these discounts must be carefully considered and properly documented to withstand scrutiny from the IRS.  Consideration must be given to the management of the company following the gift.

Step 7: Implement a Buy-Sell Agreement
While developing your succession plan, you may find the need to establish or update a buy-sell agreement. Essentially a will for your business, this agreement can outline what happens to your business interest in the event of your death, disability or retirement, ensuring a smooth transition.

Step 8: Review and Update Your Plan Regularly
Tax laws and business circumstances can (and likely will) change. It’s essential to regularly review and adjust your estate and business plans as often as necessary in order to remain aligned with your goals and the latest laws and regulations.

 

As we navigate the coming changes of the estate tax sunset, the need for strategic planning cannot be overstated. For owners of closely-held businesses, the goal is not just to safeguard the present but to secure a successful future for your heirs. By understanding the implications, assessing your current structure; and employing strategies such as gifting, trusts, life insurance, and succession planning, you can structure your business to withstand the challenges of tomorrow. Remember, the journey to legacy building is ongoing and it doesn’t happen overnight. These steps not only help protect your business but also ensure it will continue to support your family in any and all circumstances.

 

Watch our webinar below:

Under the current Tax Cuts and Job Act of 2017, individuals can transfer up to $13.61 million (per spouse, as of 2024) tax-free through their estate. But starting January 1, 2026, that exemption is expected to be cut in half, substantially affecting estate planning and tax liabilities. It’s not too early to start thinking and preparing for this change, now.

Featuring the following discussions:

Legal Ramifications for Families, Businesses & Beyond

Ronald P. Davis | Counsel, Estate, Trust & Business Planning | Maynard Nexsen PC, Mobile, AL

Your Business is Your Wealth: Preparing Your Company & Your Family

Rob Snowden, ASA. ABV | Founder & Managing Director | South Park Advisors, Charlotte, NC

What is the Estate Tax Sunset & Why Start Planning Now

Richard Littrell | Wealth Management Advisor | Oakworth Capital Bank, Central Alabama Market 

What is the Estate Tax Sunset & Why Start Planning Now

John Hensley, CFP® | Wealth Management Advisor | Oakworth Capital Bank, South Alabama Market 

Want to learn more? Read more from our Estate Tax Series.

This information is being provided for informational and educational purposes and is not meant to be taken as specific advice. All decisions regarding the legal implications of these strategies should be discussed with your advisors before being implemented.