With 2024 well underway, we’re one year closer to the sunset of the expanded lifetime estate and gift tax exemption on December 31, 2025. After this date, current exemption amounts will revert back to 2017 levels adjusted for inflation, nearly cutting them in half. The government could step in to extend it, but as of now, it appears very unlikely that will happen — so taxpayers need to plan accordingly.
As a business owner, have you thought about how this sunset will impact your tax planning? A lot of owners have used the high estate and gift tax exemption these past few years to efficiently transfer their wealth with minimal tax implications and may need time to adequately prepare their tax strategies. Being proactive now to take advantage of current rates while weighing your options for the future could save you and your business from costly surprises. Following are a few tax planning strategies you may want to consider for you and your business.
Update Your Business’s Tax Structure
There are several different tax structures you can choose from when updating the tax structure of your family business. Many family business owners opt for classifying their organization as a family limited partnership (FLP) or a family limited liability company (FLLC) because these entity options help ease the complexities that come with estate planning. These entity options permit the transfer of wealth between family members, provide protection against life changes (such as a divorce) and have discounts for gifting that could make a difference for tax planning.
Gift Minority Interest
If you’re planning to retire or transition business ownership to the next generation in a few years, one tax planning opportunity you may want to consider while exemption thresholds are high is the gifting of minority interest in your company to your heir(s). By gifting minority interest, you can start to smoothly transition leadership while leveraging valuation discounts. Minority interest in a business isn’t deemed to be as valuable as other interest, so valuation discounts can be applied on them to reduce exposure to gift tax.
When applied, these valuation discounts could significantly lower the taxable amount of the gifted interest and thus reduce the amount of gift tax you owe. This method allows you to gift more interest without worrying about you or your heir taking on substantial gift taxes. Correctly using valuation discounts involves adhering to complex tax and legal regulations, so it’s recommended to partner with a tax or estate planning professional to oversee your gifting strategy to confirm it’s compliant.
Individual Planning Considerations
For 2024, the annual gift tax exclusion is $18,000, and the unified estate and gift tax exemption and generation-skipping tax exemption is $13,610,000. With these amounts in mind, it’s just as important to review your individual tax planning strategies in addition to your business’s. Here are a few individual tax strategies you may also want to consider for yourself and your loved ones before the sunset makes a serious cut:
- Making larger gifts to the next generation, either directly or in a trust
- Distributing annual exclusion gifts
- Setting up a spousal lifetime access trust (SLAT) or grantor retained annuity trust (GRAT)
- Selling assets to an intentionally defective grantor trust (IDGT)
Regardless of how you decide to prepare for the upcoming tax exemption sunset, the first step is to determine your options with a trusted financial advisor or CPA. Everyone’s business and financial plans are nuanced, so the tax planning tactics that align best with your needs will depend on various factors. Working with an advisor and/or a tax professional ahead of time will help you ensure your tax planning is as optimized as possible, even as tax laws change.
If you don’t have a trusted tax or financial advisor, Creative Planning can help. We offer a comprehensive range of wealth management services including tax, business, estate planning and more. Whether you’re looking to optimize your business tax plan or your individual one, we have the resources and expertise to address them both. Schedule a meeting with us today to learn more about our services.
