Business owners really need to be on high guard when it comes to estate planning over the next 18 months. One of the reasons for this is because there’s going to be a radical change in estate tax laws. A lot of business owners don’t know this, but right now, in 2024, you’re able to pass up to $13.61 million in assets to someone else. Spouses are allowed to pass an unlimited amount back and forth between one another, but passing to anyone else is going to count toward your exemption amount of $13.61 million. Anything over that is going to be subject to estate tax.
Now, in 2026, there’s going to be a sunset of the current tax laws, and that exemption amount is going to go back down to $5.5 million. It will be indexed for inflation, so a lot of commentators think maybe it’ll be around $6 million or $7 million—we just don’t know until we actually get there and the IRS releases what it’s going to be.
But this is the thing to consider if you’re a business owner: One, you probably don’t know the true value of your business. A lot of business owners don’t—in fact, most don’t. And the other thing to think about when it comes to that is that the IRS doesn’t really care what the business owner thinks their business is worth. What they care about is what the business is worth in light of the tax laws, regulations, and standards. So even though a business owner may think their business is worth, say, $5 million, it could actually be worth $20 million, or maybe it’s worth $1 million. But we don’t know until a valuation expert or analyst has come in and done a proper valuation according to IRS laws.
The point of the video is really what happens if a business owner is over the estate tax exemption amount. Usually, it means that you’re going to have to sell off securities or dip into retirement accounts, but a lot of business owners have their entire wealth wrapped up in their business. So this means that their interest in the business is going to have to be sold to provide the liquidity to be able to pay off that estate tax liability. And this is a huge, huge issue, particularly for the business owner who thinks that they’re going to leave the business to the family or maybe they have an agreement in place with a key employee or something else.
So the point is, you really need to focus on doing estate tax planning now as a business owner rather than later. Work with an attorney who knows all the ins and outs of gifting strategies and selling strategies for your business and come up with a very solid succession plan so the business doesn’t have to be sold to provide liquidity for tax liability.