Estate Planning for Business Owners & BOI Reporting in 2024
Key Takeaway: With the coming estate law changes at the end of 2025, estate planning takes on a bit more urgency if you have a large estate. This is especially true if you are a business owner who wants to set up irrevocable trusts to hold some of your company stock as the new BOI reporting adds one more step to that process.
I’m hooked on Formula 1. During the COVID shutdown, I started watching Formula 1: Drive to Survive on Netflix. I have never watched a car race prior to that. But once I got into the stories of the drivers and the teams supporting them, I was hooked. I started watching the races live on Sunday mornings (they start early because they are in Europe mostly). But the more I watched, the more it became apparent that the driver was only one part of the story; the engineering is the more interesting part of the story. If the car’s engineering isn’t good, the driver doesn’t have a chance. This is why race after race in 2023 was dominated by one team (Red Bull).
History may not repeat itself, but it rhymes. Like the engineering of a car, Congress engineers our estate tax laws in a way that allows us to do certain things for a period. Then the law changes and you might not be able to do them. Then the law changes again and you might be able to do them. The sunsetting of the estate law at the end of 2025 is the current example of this, giving opportunity but also with a new twist for business owners.
Estate Tax Law Sunset
At the end of 2025, the estate law sunsets. In 2024, you can have up to $13.61 million per person ($27.22 million per couple) in your estate and have it exempt from federal estate taxes (I will not discuss state estate taxes since they vary by state). Effective January 1, 2026, that drops down to 2017 levels, adjusted for inflation; an estimate might be around $7 million per person ($14 million per couple). Basically, the exemption is cut in half.
What is not always understood is that you can gift that amount and use the exemption early (this is why it is called a gift and estate tax exemption). By gifting, you are allowed to use the exemption while living if you file a gift tax return showing that you want to use your exemption early (versus at death). The advantage to doing this is that you lock in how much you can use since you are following today’s laws. If you wait to do this until after December 31, 2025, then you must follow the laws at that time (to be fair, Congress could always change things between now and then, so maybe the current exemptions are extended).
The strategy to consider for people with large estates is to set up irrevocable trusts now to use up their exemptions just in case the limits do drop as currently written into law. Once in irrevocable trusts, any growth on those assets happens outside of the estate moving forward. I may write a future blog on how exactly to do this, but for today, I want to discuss the asset going into these trusts.
Irrevocable Trust Asset Strategy
To use a lifetime exemption, most people might default to thinking about the assets you put in trusts as normal investment assets: stocks, bonds, and cash; sometimes homes, like a cabin, get added to that. But often, the better opportunity, especially for business owners, could be shares of their working companies. This is particularly true if you own a company that has good growth potential moving forward since that growth inside an irrevocable trust would grow outside your estate. If those shares are ever sold (total business sale or just buying out the ownership the trust has), that current value is now available inside the trust to invest elsewhere.
A second reason to consider moving company shares into an irrevocable trust is to shift income to others. There are irrevocable trusts where this income can come back to the grantor, but if you want to move income off your tax return and give it to children or grandchildren in lower tax brackets, this is a method that could work.
A third reason to move company shares to an irrevocable trust is for liquidity purposes. If you have a large estate and want to use your exemption, potentially leaving the more liquid assets (stocks, bonds, cash) under your more direct control may make sense if you want the ability to spend more freely as you age.
BOI Reporting in 2024: A Hard Right Turn
Just when you think the racetrack is a straight line, a curve comes into play. The curve that started in January 2024 is the Beneficial Ownership Information (BOI) reporting (put in place by the Corporate Transparency Act) that is now required for many companies. There are exemptions for some by size—find out more here regarding all the rules—and the actual reporting is to the Financial Crimes Enforcement Network (FinCEN). The basic premise of this law is for law enforcement to better understand who the underlying owners and control persons are of all the LLCs, S corps, and other corporations in the United States so that they can better track money laundering.
I am not going to get into all the intricacies of this new law—every business owner should contact their attorney to understand how it does/does not apply to them. But generally, effective January 1, 2024, all corporations that are not exempt have until the end of the year to file (new corporations formed in 2024 must file within 90 days of formation), and then, once you file, you must refile within 30 days of any material change to ownership.
This is where estate planning gets messy. If you gift shares of your company to an irrevocable trust to use your lifetime gift and estate exemption, you have technically changed ownership and need to make sure you update your BOI report within 30 days. The penalty for not doing so is $500 per day up to $10,000 and potentially imprisonment. In working with your attorney on your estate plan, this will come up, but know that the responsibility to file is on you.
Conclusion
With current tax law expiring at the end of 2025, the time to consider estate planning changes is now. Lawyers are going to get very busy going into 2025, so lock up their time while they are fresh. There is always the chance that Congress will extend the law after this next presidential election, but if you have an estate with large assets, my assumption is it will keep growing in the future. So, your problem is still there in the long run. Gifting might make sense now.
With the new, added wrinkle of BOI reporting, business owners who want to give shares in their company must also give themselves more time to make sure they follow the rules. It should not sway you from doing good estate planning, but it may slow the process down, so plan for it.
The opinion of the author is subject to change without notice and must be considered in conjunction with relevant regulation, as well as subsequent changes in the marketplace. Any information from outside resources has been deemed to be reliable but has not necessarily been verified. Each individual has unique circumstances to which this information may or may not be relevant. Under no circumstances will this information constitute an offer to buy or sell and it does not indicate strategy suitability for any particular investor.
