As we approach the material shift in the lifetime estate and gift tax exclusions set to take effect on January 1, 2026, understanding and preparing for these changes becomes crucial for individuals and business owners. The halving of the exclusion amount presents a pivotal moment for wealth transfer planning, making the next two years critical for proactive strategies.
Understanding the Upcoming Changes
The Tax Cuts and Jobs Act (TCJA) of 2017 temporarily elevated the federal estate and gift tax exclusion, reaching a peak of $13.61 million per individual in 2024. This legislation allows individuals to transfer significant wealth without incurring federal estate taxes. However, with the TCJA provisions expiring at the end of 2025, the exclusion will revert to approximately $6 million per individual, adjusted for inflation from the 2018 base amount of $5 million.
The Critical Role of Strategic Gift Tax Planning
For business owners, this impending change underscores the importance of strategic gift planning. The IRS has confirmed that leveraging the higher exclusion amounts before 2026 won’t negatively impact estates post-2026, making early action advantageous. For instance, gifting $10 million in company stock now, under the higher exclusion, could result in substantial estate tax savings compared to waiting until after the exclusion amount decreases.
Actions for Owners of Closely Held Businesses
Given these changes, it’s imperative for owners of closely held businesses to engage with their strategic advisors—wealth managers, estate planning attorneys, and CPAs—to reassess and adjust their estate planning and wealth transfer strategies. Keep in mind that ownership interests in closely held businesses are illiquid and may not possess controls; working with a business valuation professional can result in an accurate quantitative and qualitative analysis of value.
Strategic Gifting Approaches to Consider:
- Trust Utilization: Trusts, such as Grantor Retained Annuity Trusts (GRATs) and Spousal Lifetime Access Trusts (SLATs), offer flexible strategies for transferring business interests while managing gift tax implications. Each trust structure has its nuances, benefits, and considerations, making expert guidance essential in choosing the right option for your situation.
- Recapitalization: Owners of S Corps, C Corps, and LLCs might explore recapitalizing stock. This advanced strategy allows for the gifting of nonvoting shares while retaining control and freezing the value of shares to minimize future estate tax liabilities.
- Exit Planning: Proactive exit planning is more crucial than ever. Discussing exit strategies with your advisory team can uncover opportunities to transfer wealth efficiently, ensuring your business and personal financial goals are aligned and achievable within the changing tax landscape.
Why Act Now?
Waiting until 2025 to address these changes could limit your options and increase the complexity of implementing effective strategies. Early planning not only offers more flexibility but also the potential for significant tax savings and greater financial security for your heirs.
LGA’s Commitment to Your Wealth Transfer Planning
LGA’s Business Valuation team is at the forefront of assisting business owners navigate the valuation complexities of estate planning, gift tax, and wealth transfer strategies in light of the TCJA’s sunset provisions. Our expertise in preparing compliant, closely held business valuation reports and strategic advisory services positions us uniquely to support you in optimizing your wealth transfer plans ahead of the 2026 changes.
As we edge closer to this critical juncture, the time to strategize and act is now. Let LGA guide you through the intricacies of these tax changes to secure your legacy and the future prosperity of your heirs. Reach out today to explore how we can tailor wealth transfer strategies to your specific needs and objectives.
Discover how LGA can assist in safeguarding your estate planning and wealth transfer efforts: Meet Ross Yogel, CPA, CVA, MBA, and learn more about our Business Valuation services. Your proactive planning starts with us.
About the Author
Ross Yogel, MBA, CPA, CVA, MAFF
Ross Yogel is a partner at LGA. He specializes in serving clients and attorneys in need of closely held business valuations, financial forensics, and financial consulting. Ross is a licensed Certified Valuation Analyst (CVA), Master Analyst in Financial Forensics (MAFF), and CPA and has been working in business valuation for over ten years. A sample of the industries Ross has served include restaurants, real estate, healthcare, insurance, sales, automobile dealerships, manufacturing, architecture, and construction. Some services he has provided to clients and attorneys include: estate and gift planning valuation, litigation support valuation, start-up/venture consulting, data analytics, quality of earnings due diligence, and fraud and forensic investigations.
