Small business solutions to minimize estate taxes

If you're an entrepreneur, your business is likely your most valuable asset. Fail to take the time to plan for disability or death and your estate may face significant tax consequences. So how do you protect your business and your heirs?

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by Stephanie Morrow
updated March 24, 2023 ·  3min read

As an entrepreneur, your life is frantic—every day is different from the day before. Planning for what will happen to your business after you're gone is probably the last thing on your mind. Although death or incapacitation is a reality many entrepreneurs avoid planning for, the best defense against resulting business catastrophes is a well-prepared, flexible estate plan. The most crucial consideration in your plan is taxes. Understand them, take advantage of any changes to them, and if possible, avoid them all together.

Estate tax

The most important part of estate planning is minimizing the estate tax hit for your heirs. You have probably heard of this tax, also called the "death tax," which is a charge levied on a decedent's entire estate, regardless of how it is disbursed. It is a tax imposed on the transfer of property, including a business, from a deceased person to his or her heirs, legatees, or devisees. While married individuals are allowed to leave all of their financial holdings to a spouse free of any estate tax, when the surviving spouse dies, his or her heirs could face a huge tax bill if a well-thought-out estate plan is not in place. In 2008, for example, estates valued at $1.5 million or more were taxed $555,800 plus 45 percent of the amount over $1.5 million.

Upcoming changes

The federal government grants an estate tax exemption, known as the "applicable exclusion amount," that is subject to yearly changes. This exemption effectively increases the amount of assets an individual can pass on to his or her family without exposing assets to a hefty estate tax. In 2008, $2 million could be passed tax-free to an heir. This number rises to $3.5 million in 2009. Business owners who pass away in 2010 will have a good chance of eluding the estate tax all together—it will be repealed that year. In 2011, however, the tax is back in full swing, with only $1 million allowed in exempt assets.

The key to navigating tax changes is to include some flexibility in your estate plan. If you can, rework your estate plan each year to account for tax law changes at the federal and state levels—some of the changes will go beyond increasing or decreasing exemption amounts. Let's say you pass away and have not accounted for a huge alteration in the tax code which would save your heirs hundreds of thousands of dollars. When establishing your estate plan, include provisions that will allow your heirs to adjust your estate to the current tax circumstances.

Deferrals and gifts

Besides planning for exemptions, there are other methods available to help you decrease your tax burden:

  • Estate tax deferral: The tax code allows you to defer the estate tax by extending payout. An installment payment plan can be set up for estate tax payments, proportional to the value of your business.
  • Gifting: The annual gift exclusion allows gifts of cash or property of $12,000 or less, per recipient, per year, to be free of federal gift taxation. Such gifts, including the appreciation in value and the future income derived, are excluded from federal, estate, and generation-skipping transfer taxation. Use this provision to transfer portions of your business to your beneficiaries while you are alive, reducing the amount of your estate subject to taxation after your death.

Do your homework

There are other beneficial legal devices to look into when developing your estate plan. The following strategies require longer explanations and relate to specific circumstances. However, if they're right for you, these strategies could prove advantageous for the people you're leaving behind. Investigate the following and see how they may be able to help your family's future:

  • Living trusts
  • Marital deduction trusts
  • The unified credit/exemption equivalent trust
  • The dynastic trust
  • The statutory grantor retained interest trust

Remember, revisiting your estate plan is important if you experience a major life change, such as marriage, divorce, or a new addition to your family, like a child or grandchild.

You should always discuss any estate plan options with your financial advisors. Make sure you're taking advantage of every legal tool available under the current estate tax laws. The later you start implementing an estate plan, the more costly the tax consequences for your heirs.

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Stephanie Morrow

About the Author

Stephanie Morrow

Stephanie Morrow has been a contributor to LegalZoom since 2005 and has written about nearly all aspects of law, from ta… Read more

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of the author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.