Legacy Planning

Estate Planning for Business Owners: Protect Your Legacy

Succession, Taxes, and Wealth Transfer

Business owners face unique estate planning challenges. Learn succession planning, valuation discounts, and wealth transfer strategies to protect your business legacy.

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$15M

Permanent Estate Tax Exemption (OBBBA)

$30M

Married Couple Exemption

40%

Federal Estate Tax Rate Above Exemption

25-40%

Typical Valuation Discounts for Business Interests

Quick Answer

OBBBA made the $15M estate exemption permanent - focus now on protecting future business appreciation
Business interests in FLPs/LLCs can qualify for 25-40% valuation discounts, transferring $10M at $6-7M value
GRATs transfer business appreciation to heirs gift-tax-free if growth exceeds the IRS hurdle rate (~5%)
Life insurance in an ILIT provides estate tax liquidity without increasing the taxable estate
Without proper planning, 70% of family businesses fail to survive to the second generation

The Opportunity

Why Estate Planning Matters

Business Succession Planning: Ensure Continuity

Without proper planning, a business owner death can trigger chaos: unclear leadership, family disputes, forced sales, and value destruction. A succession plan identifies successors, establishes governance, and creates smooth transitions. Most family businesses fail to survive to the second generation - proper planning changes those odds.

Estate Tax Minimization: Keep More in the Family

The One Big Beautiful Bill Act (OBBBA) made the federal estate tax exemption permanent at $15M per person ($30M for married couples). Business interests often represent the largest estate asset. Strategic planning - including trusts, valuation discounts, and gifting strategies - can save millions in estate taxes for larger estates.

Valuation Discounts: Transfer More with Less Tax

Business interests held in LLCs or FLPs can qualify for valuation discounts of 25-40% due to lack of marketability and minority interest discounts. A $10M business interest might transfer at $6-7M for gift/estate tax purposes. These discounts are powerful but face ongoing IRS scrutiny.

Life Insurance Liquidity: Pay Taxes Without Selling

Estate taxes are due 9 months after death. Without liquidity, heirs may need to sell business assets at fire-sale prices. Life insurance in an irrevocable trust (ILIT) provides tax-free funds to pay estate taxes, allowing the business to remain intact and continue operating.

Implementation

Proven Strategies

Grantor Retained Annuity Trust (GRAT)

Transfer business interests to a GRAT, retaining an annuity payment for a set term. If the business appreciates faster than the IRS hurdle rate (currently ~5%), excess growth passes to heirs gift-tax-free. GRATs can be "zeroed out" for minimal gift tax while transferring significant appreciation.

Best for: Business owners expecting significant appreciation who want to transfer that growth to heirs without using gift tax exemption.

Example:

$5M business interest transferred to 2-year GRAT at 5.4% hurdle rate. Business appreciates 15% annually. After 2 years: $5.5M returned via annuity (principal + hurdle rate), $1.15M excess appreciation passes to heirs gift-tax-free.

Intentionally Defective Grantor Trust (IDGT) Sale

Sell business interests to an IDGT for a promissory note. The trust is "defective" for income tax (grantor pays tax on trust income) but effective for estate tax (assets removed from estate). The owner gets installment payments while appreciation occurs outside the estate.

Best for: Business owners with appreciating assets who want certainty (sale vs. GRAT gambling on appreciation) and ongoing income stream.

Example:

$10M business interest sold to IDGT for 9-year note at 5% AFR. Annual payments: $1.4M. Business grows 12% annually. After 9 years: $10M+ returned to seller, $15M+ appreciation passes to heirs estate-tax-free. Grantor paying trust income taxes further reduces estate.

Family Limited Partnership (FLP) with Annual Gifting

Contribute business interests to an FLP, then make annual gifts of limited partnership interests to heirs. Limited interests qualify for valuation discounts (30-40%), magnifying the impact of annual gift exclusions ($18K per recipient in 2024) and lifetime exemptions.

Best for: Business owners wanting gradual transfer of business interests while maintaining control and capturing valuation discounts.

Example:

$8M business in FLP. 35% combined discount = $5.2M value for gift purposes. Annual gifts to 4 children/spouses = $144K face value gifted at ~$94K discounted value per year. Systematic gifting over 10 years transfers majority of business with minimal gift tax.

Avoid These Pitfalls

Common Mistakes

Waiting to Plan for Estate Growth

With the $15M exemption now permanent under OBBBA, the urgency shifts to protecting future appreciation. Business values grow over time - today's $10M business could exceed exemption thresholds in 10-20 years. Use transfer strategies now while values are lower to freeze growth outside your estate.

No Buy-Sell Agreement or Outdated Agreement

A buy-sell agreement establishes what happens to business interests at death, disability, or departure. Without one, the deceased owner shares may pass to unintended heirs who become unwanted business partners. Review and update buy-sell agreements every 2-3 years.

Insufficient Liquidity Planning

Estate taxes are due in cash within 9 months of death. If the estate consists primarily of illiquid business interests, heirs may need to sell assets at distressed prices or take on debt. Life insurance in an ILIT provides tax-free liquidity without increasing the taxable estate.

Questions

Common Questions

Here are the most common questions we receive about this topic.

Ask Your Question

Now. Estate planning is not just about death - it is about protecting your business and family from unexpected events at any age. Key milestones: when you start a business, when business value exceeds $1M, when you have children, and especially when estate exceeds federal exemption. The $15M exemption is now permanent under OBBBA, but transferring assets at today's lower values locks in savings.

Valuation discounts reduce the fair market value of business interests for gift/estate tax purposes. Lack of marketability discount (no ready market to sell): 15-30%. Minority interest discount (no control): 15-25%. Combined discounts of 25-40% are common but must be supported by qualified appraisals. The IRS actively challenges excessive discounts.

If your estate will owe estate taxes, life insurance provides liquidity to pay those taxes without forcing a business sale. Owned personally, life insurance proceeds are included in your taxable estate. Owned by an irrevocable life insurance trust (ILIT), proceeds are excluded from your estate and received tax-free by the trust.

Multiple approaches: (1) Outright gift (uses exemption, may trigger gift tax), (2) Sale (you receive value, no gift tax), (3) GRAT (transfer appreciation gift-tax-free), (4) IDGT sale (installment payments, appreciation outside estate), (5) FLP with annual gifting (gradual transfer with discounts). The right approach depends on your goals, business value, and family dynamics.

State intestacy laws determine who inherits (typically spouse and children in varying shares). Business operations may be disrupted. Heirs may fight over control or direction. The business may need to be sold to pay estate taxes or satisfy heirs who want cash. Family relationships can be permanently damaged. All of this is preventable with proper planning.

Ready to Protect Your Business Legacy?

With the $15M exemption now permanent, focus shifts to protecting future appreciation and ensuring smooth succession. Let us help you create a comprehensive estate plan for your business.

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