Now is a Good Time to Review Strategies for Estate Taxes & Gifting

With a look forward to December 31, 2025, when the current lifetime exclusion levels for estate taxes are slated to sunset, wealth planners and their clients have much to discuss. They have a key opportunity to strategize and develop the best plans for family businesses and high-net-worth individuals.

Under the 2017 Trump-era tax reform bill (the Tax Cuts and Jobs Act, or TCJA), the lifetime estate and gift tax exemption jumped from $5 million (as indexed for inflation) to $10 million per person (as indexed for inflation). For 2024 the IRS threshold for estate tax is $13.61 million. (For the purposes of this article, we assume the level will remain at $13.61 million until 12/31/25.)

The exclusion applies to the entirety of one’s estate, which could include cash, stock, real or personal property and family businesses.

In some instances, family-owned businesses are placed in jeopardy when a founder passes if the business’ wealth is not liquid. In these cases, the family businesses may need to be sold so that the estate taxes can be paid.

Here are some strategies that allow family businesses to stay intact and allow wealth to be passed on to the next generation:

  • Transfer a percentage of the business to beneficiaries while the founder is alive.
  • Transfer exclusion monies to a spouse.
  • Purchase life insurance for the founder.
  • Arrange for the founder (before he/she passes) to put into place a plan for the sale of the business, with the sale going into effect after his/her demise.
  • Transfer various assets into an intentionally defective grantor trust.
  • Gifting to a spousal lifetime access trust (SLAT).
  • Make use of IRS Code 6166.

Understanding the Strategies

Let’s take a deeper dive into each of these strategies.

Transfer a percentage of the business to beneficiaries while the founder is still alive.

When a business founder transfers shares of the business to offspring or others while he/she is still alive, depending on the facts and circumstances, a discount may be applied to the share value. For example, Bob transfers $5 million of value in shares (non-voting) to his daughter, Joan. Bob retains control of all the voting shares, so Joan has no say in running the business: Joan lacks control and marketability. Because of these impediments, the $5 million portion in shares would likely be discounted. Such discounts can be as high as 30-35 percent. The upshot is that Bob would have given Joan a FMV gift of not $5 million, but say, around $3.5 million. The $3.5 million is deducted from Bob’s $13.61 million lifetime estate tax exclusion. Separate from this usage of his estate tax exclusions, Bob can still gift up to $18,000 in total per year to other individual family members (or nearly anyone else) without triggering transfer tax implications.

Leverage each spouse’s lifetime exclusion.

Statistically, men generally pass away at a younger age than women. So, if a business is owned by husband and wife, one strategy is to have the husband give away some or all of his ownership portion before the close of 2025, to take advantage of the $13.61 million exclusion. If the husband does not use the full $13.61 million, under current law, there is a portability provision: upon his demise, any remaining exemption available can be transferred to his surviving spouse, which can increase her lifetime exemption by the DSUE (Deceased Spouse’s Unused Exclusion).

Purchase life insurance for the founder.

Life insurance can be purchased for the founder outside the estate (e.g., in a Life Insurance Trust) so when the founder passes, the beneficiaries can use the proceeds to pay the estate taxes. This can be complicated, sue to the fact that many family businesses take time to develop their value, and by the time there is a significant insurable interest, the business owners may be older and the price to purchase life insurance may be cost-prohibitive.

The founder, before he/she passes, could arrange for a sale business, with the sale going into effect after his/her demise.

A high-profile owner of a major sports team documented details in his estate plan, about the sale of his team after his passing – even discussing it with the league before his passing and recommending which investment house to use to help with the sale. This relieved the beneficiaries from brokering a deal and provided proceeds used to pay estate taxes.

Invest in an intentionally defective grantor trust.

Generally, assets held within an intentionally defective grantor trust have certain protections that keep such assets out of the grantor’s estate; while taxes on income within the trust are paid by the grantor, which further inures benefits to the beneficiaries. The payment of the taxes on the trust income depletes the grantor’s other assets, without diminishing the value of the assets within the trust.

Gifting to a spousal lifetime access trust (SLAT).

Some high-net-worth individuals work with an attorney to set up a spousal lifetime access trust (SLAT). A SLAT is an irrevocable trust and therefore the assets that are transferred into the SLAT are not included in the individual’s estate. The SLAT is created by one spouse for the benefit of the other. While the donor spouse gives up his or her right to the property transferred to the trust, the beneficiary spouse maintains access to that property. The beneficiary primarily is the spouse and then other family members. The gift uses the grantors lifetime exemption and can also use GST exemption. The SLAT is taxed as a grantor trust, the grantor will need to pay the taxes on the income and should have enough funds outside of trust to pay the taxes. There are risks involved in the case of divorce since the trusts are difficult to unwind. On that note, attorneys should be careful to create language to handle this potential situation.

Make use of IRS Code 6166 election.

Under IRS Code 6166, executors of certain closely held businesses can make an election to defer payment of taxes after an owner’s death. This usually occurs with highly illiquid estates (e.g., real estate companies), that do not have funds on hand to pay estate taxes and do not want to sell the assets in their portfolio. There is a five-year deferral period from paying the estate tax (interest does accrue and must be paid each year 1-5) and a 10-year installment payment period (years 6 – 15) in which the tax and interest are paid. In order to take advantage of the estate tax deferral an election needs to be filed no later than the due date of the estate return. This means if the estate is going on extension the 6166 election needs to be filed with extension due 9 months after date of death and then revised as actual returns are filed.

The Big Picture

Estate tax exclusions for purposes of gifting have changed over the years, based on political circumstances. For example, under George W. Bush, there was no cap on the estate tax exclusion for those passing away in 2010, and that temporary policy benefitted many businesses and family members, including the family whose patriarch owned a major sports team and an oil & gas billionaire. Since they passed during 2010, their assets were passed down without being affected by current estate taxes.

The conclusion? We don’t know how things are going to turn out, but it is certainly the best time now to consider taking advantage of the current higher exclusion of gifting, as the laws are most favorable. This assumes that individuals (including business founders) can afford to and want to give away their assets and business shares. The crystal ball is cloudy, so the time is now to start considering options.

Written by Jacob Meth, CPA, JD, Managing Director and Lead, Private Client Services, CBIZ

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Facing estate taxes can be daunting, but with the right strategies, securing your legacy becomes easier. Learn how with our comprehensive guide.

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