The estate tax, often referred to as the “death tax,” has long been a contentious issue in U.S. tax policy. Currently, the estate tax exemption allows individuals to transfer a significant amount of wealth to their heirs without incurring tax liabilities. However, potentially significant changes in tax policies are on the horizon, with the estate tax exemption being a notable focal point.

The estate tax exemption is currently at an unprecedented high but may be subject to “sunsetting” in the near future. This potential shift presents a crucial opportunity for individuals and businesses to engage in comprehensive estate planning, particularly through the lens of business valuation. Understanding the implications of these changes and taking proactive steps now can yield substantial benefits and ensure financial stability for future generations.

The Current State of the Estate Tax Exemption

For 2024, the exemption stands at $13.61 million per person, and $27.22 million for a married couple. This high threshold means that most estates are not subject to the estate tax.

However, the exemption is set to decrease significantly in 2026 when the provisions of the Tax Cuts and Jobs Act (TCJA) expire, reducing the exemption to approximately $7.5 million per individual and $14.5 million for a married couple, adjusted for inflation.

Potential Rollback: What It Means

The rollback of the estate tax exemption could have far-reaching implications in several areas.

  1. Increased Tax Liability: With a lower exemption threshold, more estates will be subject to federal estate taxes. For many families and business owners, this means a significant increase in tax liability upon the transfer of wealth.
  2. Impact on Family Businesses: Family-owned businesses are particularly vulnerable. The lower exemption could force heirs to sell parts of, or entire businesses to pay the estate tax, disrupting operations and undermining long-term business continuity.
  3. Valuation Challenges: As more estates fall within the taxable range, accurate and strategic valuations become essential. Proper valuation can help minimize tax exposure and maximize the efficiency of wealth transfer strategies.
Why Now is the Time to Plan

Given all of the uncertainty surrounding the estate tax exemption, now is the optimal time to engage in proactive estate planning. Here’s why:

  1. Leverage the Current Exemption: Utilizing the current high exemption allows individuals to transfer more wealth tax-free. This can be done through various strategies such as gifting, creating trusts, or transferring ownership interests in family businesses.
  2. Strategic Business Valuation: Valuation plays a critical role in effective estate planning. An accurate and defensible valuation of your business or assets can help you leverage discounts and minimize estate tax liability. With potential changes on the horizon, having a current valuation ensures that you can make informed, strategic decisions.
  3. Avoiding Forced Sales: By planning ahead, you can avoid the risk of forced sales to cover tax liabilities. This is particularly important for family businesses, where maintaining operational integrity and family control are often paramount.
  4. Flexibility and Control: Early planning provides the flexibility to explore various strategies and adjust as needed. This could include establishing family limited partnerships, charitable trusts, or other vehicles that align with your financial goals and values.
Steps to Take Now

Here are a few things you can do right now to put you in a position for success:

  • Engage with Professionals: Consult with estate planning attorneys, tax advisors, and valuation experts. Their insights and expertise are invaluable in navigating the complexities of estate planning and tax law.
  • Conduct a Comprehensive Valuation: Obtain a professional valuation of your business and significant assets. This provides a clear understanding of your estate’s worth and helps in devising effective tax minimization strategies.
  • Implement Gifting Strategies: Utilizing the current high exemption threshold, individuals can transfer wealth through gifts. By gifting assets now, individuals can lock in the current exemption amount, potentially reducing the taxable value of their estate. Valuations are crucial in this process to ensure compliance with IRS guidelines and to avoid disputes over the value of gifted assets.
  • Trust Planning: Trusts are a powerful tool in estate planning. By placing assets in a trust, individuals can control how and when their assets are distributed to beneficiaries. Trusts can also provide tax benefits, but accurate valuations are necessary to determine the value of assets placed in the trust and to ensure that the terms of the trust are met.
  • Charitable Donations: Donating to charitable organizations is another effective strategy for reducing estate tax liabilities. A proper valuation can help determine the value of donated assets, ensuring that both the donor and the charity receive the maximum benefit.
  • Life Insurance Policies: Life insurance can be used to cover estate taxes, providing liquidity to pay tax liabilities without having to sell off assets. Valuations can help in determining the necessary coverage amount, ensuring that heirs are not burdened with unexpected tax bills.
  • Review and Update Your Estate Plan: Ensure your estate plan reflects current laws and your long-term objectives. Regular reviews and updates are essential, especially in light of potential changes in tax policy.

The potential rollback of the estate tax exemption underscores the importance of proactive estate planning. By acting now, you can leverage the current high exemption, strategically value your assets, and ensure the smooth transfer of wealth to future generations.

The expertise of professionals in valuation, taxation, and estate planning is critical to navigating these changes effectively. Planning ahead not only safeguards your financial legacy but also provides peace of mind in an uncertain tax landscape.

About the Author:

Dave Bookbinder is Executive Director of Valuation Services at Haefele Flanagan. He is a is a corporate finance executive with a focus on business valuation and intangible asset valuation.  Known as a collaborative adviser, Dave has conducted valuations of the securities and intellectual property assets of public and private companies across all industries for various purposes.

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