This information is derived from Rehmann’s Private Client Advisory (PCA) experience, a uniquely tax-aware approach to growing and protecting wealth through a team of specialists curated for each PCA client’s needs.
The biggest and most persistent question business owners typically face when laying the groundwork for their planned exit strategy is this: “Should I sell my business or hand it down to the next generation?”
Those of you that have already determined — after much consideration with your team of professional advisors and affected family members, of course — that you’ll transfer your business to your heirs, this article is for you.
It’s an introduction to some of the tools and strategies you and your advisor could use in succession planning to minimize tax burdens, optimize your financial future, and support the continuity of your business and the success of the next generation who will lead it.
(Leaning toward selling? Stay tuned; we’ll cover that in the upcoming article)
The Best Succession Strategy: Start Planning as Early as You Can
Whether your business is a small family-owned operation or a large-scale enterprise, successful succession planning takes careful preparation. Delaying these conversations can leave your business exposed to legal disputes, tax inefficiencies, and operational uncertainty. You can also miss out on taking advantage of unique opportunities that arise.
A great example is the 2017 Tax Cuts and Jobs Act (TCJA), which offers an extraordinary opportunity to maximize your ability to minimize estate taxes. Under current law, the TCJA allows you to give the next generation twice the amount you could (before TCJA) without incurring federal estate or gift taxes: a lifetime estate and gift tax exemption of $13.99 million for individuals and $27.98 million for couples, indexed for inflation. However, that window of opportunity may be closing soon. The act is set to sunset on Dec. 31, 2025. Unless the government intervenes, the exemptions will decrease to approximately $7 million for singles and $14 million for couples beginning in 2026.
The Best Succession Rule: Plan, Don’t Predict
Regardless of what your ultimate exemption amount is, the TCJA isn’t only a good example of why talking about your plans with your advisory team and family needs to happen many years before your exit process begins. Its uncertain future illustrates one of the most crucial rules for optimizing your financial future: plan, don’t predict.
Opportunities like the TCJA can and do arise, but they’re impossible to predict and rarely permanent. For that reason, banking on what might happen with tax law is a risky approach. Just like with gambling, when things don’t go as predicted, you can be left with far less than you started with. Instead, begin planning for your financial future early, and plan based on what you do know — current laws, your family’s financial circumstances and needs, etc.
Acting proactively rather than reactively can help limit your exposure to uncertainty. And when beneficial opportunities like the TCJA do arise, you’ll be poised to take advantage before they disappear.
That said, let’s explore some estate, gift, and tax strategies that are available now and can have a profound impact on your succession planning process and its outcome.
Establishing Trusts for Gifting and More
Trusts are powerful tools that can minimize estate taxes and maximize wealth transfer to the next generation. They also provide a structured approach to managing the transfer of business ownership, ensuring control over how and when heirs receive their inheritance. Additionally, trusts offer protection from creditors and potential legal disputes, helping your business remain intact and operate smoothly during the transition period.
Gifting Strategies
Gifting is an effective method to reduce the size of your taxable estate, potentially lowering estate taxes upon your passing. By gradually gifting portions of your business to your heirs, you can utilize the lifetime gift tax exemption, which is currently more favorable due to the Tax Cuts and Jobs Act (TCJA). This approach also freezes the business’s value for your heirs, providing significant tax benefits.
For instance, if you gift $1 million of your business to your son today, and the business grows to $10 million in ten years, you have effectively removed $9 million of appreciation from your taxable estate. Gradual gifting can also facilitate a smoother transition of responsibilities and leadership, aligning your heir’s involvement with their increasing ownership stake.
Examples of Gifting Strategies
- Annual Exclusion Gifts: These allow you to gift up to the annual exclusion amount ($19,000 in 2025) per recipient per year without incurring gift tax. This strategy can transfer significant value over time without using your lifetime estate and gift tax exemption. However, consider the associated costs, as multiple small gifts may not always be cost-effective.
- Family Limited Partnerships (FLPs): FLPs help manage and protect wealth while ensuring smooth generational transitions. By transferring business interests into an FLP and gifting partnership shares to heirs, you can leverage valuation discounts, reducing the taxable value of the gifted shares and minimizing gift tax liability. It’s crucial to work with knowledgeable advisors due to IRS scrutiny.
Trust Strategies to Consider
- Grantor Retained Annuity Trusts (GRATs): GRATs allow you to transfer business interests to your heirs while retaining annuity payments for a specified term. The value of the gift is reduced by the present value of the annuity payments, potentially resulting in significant tax savings if the business appreciates. A zeroed-out GRAT can minimize risk, as it uses minimal or none of your exemptions at the time of transfer.
- Intentionally Defective Grantor Trusts (IDGTs): An IDGT enables you to sell your business interest to a trust in exchange for a promissory note, without using any of your exemption. Any appreciation in the business value occurs outside of your taxable estate, providing tax-efficient asset transfer while maintaining cash flow for you, the grantor. The “defective” nature of the trust for income tax purposes means there is no immediate taxable gain on the sale.
Valuation Discounts
A valuation discount is essentially a reduction that’s applied to the value of an asset or business interest when determining its fair market value for gift and estate tax purposes. By reducing the taxable value of transferred assets, which ultimately lowers estate and gift taxes and preserves more of your wealth for your heirs, these discounts can be particularly beneficial when transferring ownership interests in family-owned businesses. Three most common:
- Discount for Lack of Marketability (DLOM): Applied to assets that aren’t easily sold or traded in the open market, this discount accounts for the challenges and costs that come with trying to sell interest in privately owned businesses.
- Discount for Lack of Control. Used for minority interests where the holder doesn’t have decision-making power, this discount reflects the lower value of shares that don’t confer ownership control.
- Minority Interest Discount: Used for ownership interests that represent a minority stake in the business, this discount accounts for the limited power and influence of minority shareholders.
Build Your Legacy with Confidence
The process of transferring your business to the next generation is both complex and rewarding. With the right planning, you can create a sustainable future for your business while minimizing tax burdens and ensuring family harmony. Although there are many paths, finding the right one for you and your family will be far less complex and more rewarding if you follow these time-tested recommendations:
Thoughtfully plan and avoid relying on predictions. Tax laws, life events, and your wishes are subject to change — sometimes outside of your control.
Recognize that the tools and strategies included here are just some of the options available to you in succession planning. Each has its own pros and cons, and whether you use some, several together, or others not highlighted here, building the best plan for you, your family, and your business requires careful consideration of multiple factors: your circumstances, risk tolerance, how simple or complicated a structure you’re willing to undertake, family dynamics, the weighing of fairness and equalization of your estate (if, say, you have multiple heirs but only one will own or actively run the business), and more.
As such, I don’t recommend planning alone or even with the aid of a single advisor. Rely instead on an experienced team of advisors who will work together to understand you, your family, and your business, as well as your personal, financial, and business goals. Ultimately, you’ll want an integrated team of specialists so you can fully explore strategies that align with your vision and can help your family business thrive for generations to come.
(Tip: Look for advisory teams that offer sophisticated modeling to help you identify the most efficient way to maximize tax exemptions, plan your estate, and preserve your legacy.)
Finally, act early to ensure you receive personal attention and allow time for thoughtful conversation and consideration in curating the right plan for you, your business, your family, and your future.
Investment advisory services offered through Rehmann Wealth, a Registered Investment Advisor. Securities offered through Rehmann Financial Network, LLC, member FINRA/SIPC. Insurance Services offered through Rehmann Insurance Group.