Estate Planning for Business Succession Amid Possible Tax Changes

Despite the potential extension of the current estate tax exemption amounts, estate planning remains crucial for business succession. The Tax Cuts and Jobs Act (TCJA) of 2017 temporarily doubled the estate and gift tax exemption, allowing individuals to transfer up to $13.61 million ($27.22 million for married couples) without federal estate or gift taxes for 2024. However, strategic planning is still necessary.

Strategic Asset Transfer

Transferring business assets to successors early can be beneficial, especially if those assets are likely to appreciate. Strategies like grantor retained annuity trusts (GRATs) and installment sales to intentionally defective grantor trusts (IDGTs) help transfer future asset appreciation while retaining some income or interest, reducing the taxable estate's value and aiding business ownership transition.

Family Limited Partnerships

Family limited partnerships (FLPs) or family limited liability companies (FLLCs) are useful for leveraging the annual exclusion and lifetime exemption in business succession. These entities allow families to pool business assets, creating different ownership classes. By gifting or selling non-voting or limited interests to successors at a discounted value, more wealth is transferred while retaining voting interests. This method supports wealth transfer and structured management of family businesses.

Personal Cash Flow and Successor Needs

Evaluating personal cash flow requirements and the needs of successors is vital. Assessing the financial situation and successors' capability to manage the business responsibly helps in establishing trusts or other fiduciary vehicles that provide protection and guidance while maintaining some flexibility and control for the grantor. This approach safeguards the business legacy and prepares new management.

Adapting to Changes

Business succession planning must adapt to potential tax law changes and personal circumstances. Even if TCJA provisions are extended, thorough estate and financial planning remains essential. Evaluating potential estate tax liability and its impact on business continuity is crucial. Staying informed about legislative changes and adjusting strategies accordingly preserves the efficacy of succession plans.

Comprehensive estate planning for business succession is indispensable for effectively managing, preserving, and transferring business wealth, regardless of estate tax implications. Strategic asset transfers, family limited partnerships, considering personal and successor needs, and adapting to changes create robust succession plans that withstand evolving tax laws.

For more information on CLA contact Joe Drish at joe.drish@CLAconnect.com or 319-558-0299.

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, investment, or tax advice or opinion provided by CliftonLarsonAllen LLP (CLA) to the reader. For more information, visit CLAconnect.com. CLA exists to create opportunities for our clients, our people, and our communities through our industry-focused wealth advisory, digital, audit, tax, consulting, and outsourcing services. CLA (CliftonLarsonAllen LLP) is an independent network member of CLA Global. See CLAglobal.com/disclaimer. Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC, an SEC-registered investment advisor.