Gift & Estate Tax Planning for Small Business Owners: The Time to Plan Is Now

Most owners of small and mid-sized businesses are well aware of the need to create estate plans that allow them to control and protect their assets upon their death, but few truly understand the importance of proper gift and estate tax planning as part of their overarching estate plan.

While we discuss gift and estate planning with our clients regularly, now is an important time to call attention to it, and for you to take action. Here’s why:

The current “high” exclusion amounts were created by The Tax Cuts and Jobs Act of 2017, which increased gift and estate tax exclusion amounts beginning in 2018 through 2025. On January 1, 2026, the higher exclusion amount will “sunset” and revert back to the 2017 amount of $5 million, adjusted for inflation.

The time is now to implement gift and estate tax planning strategies so you can take advantage of these increased exemptions before it’s too late.

Why Gift & Estate Tax Planning Is Important for Small and Mid-Sized Business Owners

You’ve worked hard to create and build your business. Don’t let your hard work and your legacy get eroded away by estate taxes.

The Benefits of Gift & Estate Tax Planning

Here are some of the key benefits of comprehensive gift tax and estate tax planning:

Maximize tax benefits

With the right planning in place, you’re able to take advantage of the many tax benefits laid out in state and federal tax laws. This allows you to control what you do with the property you’ve amassed thanks to your business and ensure more of your assets are transferred to your desired beneficiaries.

Transfer wealth according to your wishes

Estate planning is built to help you transfer your assets to preferred beneficiaries instead of resorting to basic inheritance laws. With the right tax planning as part of your estate plan, you’re ensuring more of your assets transfer to your desired beneficiaries.

Ensure your business continues operating

In the absence of proper planning, your heirs may find the need to sell or liquidate your business holdings to pay estate taxes. You can make sure your business continues to operate without you, without fear of tax consequences, by working with a dedicated estate tax planner.

The Difference Between Gift Taxes and Estate Taxes

Gift tax planning and estate tax planning are almost always mentioned together, but they are two completely separate vehicles for transferring wealth. Here’s how they differ.

Gift Tax Planning

This involves taxes associated with the gift of assets during your lifetime. It’s important to note that gift taxes can apply to any transfer of property where you receive nothing or less than the full value of the asset in return.

You’re taxed on the amount of the gift in excess of the current exemptions afforded by state and federal tax laws and you as the donor are responsible for paying these taxes. Tax planning for gifts involves understanding the exemptions and exclusions allowed under state and federal tax laws.

Estate Tax Planning

This manages the taxes relating to the transfer of your assets after you pass away. Taxes apply to your full estate and are paid out of your estate before any assets are distributed to your named beneficiaries.

Proper planning can reduce or eliminate any estate tax upon your passing and requires a thorough understanding of state and federal tax exemptions and deductions.

Special Considerations Involving Minnesota State Taxes

Most of this article focuses solely on the tactics and strategies you can use to limit your tax obligations for gifts during your lifetime or with your estate after your death.

However, there are a couple of items to note regarding Minnesota-specific rules and laws involving gift and estate taxes.

Minnesota gift taxes

The Minnesota legislature repealed the state’s gift tax, effective March 21, 2014. This means Minnesota does not tack on its own taxes in addition to federal taxes on gifts.

Minnesota estate taxes

Minnesota’s estate tax applies to Minnesota residents or individuals who own assets in Minnesota. These taxes are imposed on the individual’s estate upon their death. Tax rates range from 13% to 16% on assets in excess of $3 million. There are also special deductions like the Minnesota Qualified Small Business and Farm Property Deduction which can allow an additional exemption for certain qualified assets. Due to the complexities of the tax law, an experienced financial professional can assist you in structuring your estate to ensure your desired beneficiaries maximize the amount received from your estate.

Tax Planning Strategies for Business Owners

Gift Tax Planning Strategies

When you gift assets to someone, the last thing you want is for that gift to be diminished in any way or for some of that gift to go somewhere you don’t intend it to. That’s where gift tax planning comes into play.

By implementing the right tools, you can limit or eliminate any tax liability tied to gifts you give. Here are several tools you can use as part of your overarching tax planning efforts.

Lifetime Exemption for Gifts

As mentioned at the beginning of this article, the current federal lifetime exemption for gifts is $12.92 million. This exclusion will drop dramatically in 2026 to approximately $6 to $7 million.

If actions are taken before the end of 2025, you’ll be able to maximize the increased lifetime exclusion, benefiting those who receive the gifts and lowering your estate’s overall taxable value.

Should you give away less than the higher current exemption through the end of 2025, you will be held to the lower exemption amount which is to sunset at the end of 2025.

The higher current exemption is a use-it-or-lose-it concept, meaning that if much or all of the higher exemption isn’t utilized, you’ll be limited to the lower exemption amount after 2025.

For Individuals Dying on or After January 1, 2026

Annual Exclusions

In 2023, there exists an annual gift tax exclusion that allows you to transfer up to $17,000 per donee, gift-tax-free. Additionally, these gift amounts don’t apply to your lifetime exemption.

By being smart about your annual individual gifts, you can make the most of your wealth transfer goals without eating into your goals for maximizing your lifetime gift exemption.

Charitable Giving

Charitable giving involves transferring property (real or otherwise) to charitable organizations. There are many options available to you to gift assets to charities without incurring gift taxes.

These include charitable lead annuity trusts, charitable remainder trusts, donor-advised funds, qualified charitable distributions from IRAs, and other potential charitable vehicles.

It’s not always clear which charitable giving vehicle will work best, which is why speaking with a knowledgeable financial professional is the right first step.

Estate Tax Planning Strategies

As with gift tax planning, the goal of implementing any estate tax planning efforts is to reduce any tax liabilities involving the distribution of your estate. Here we provide a few potential estate tax planning strategies to do just that.

Intentionally Defective Grantor Trusts (IDGTs)

An IDGT is an irrevocable trust created during your lifetime. As the grantor, you are responsible for any income associated with the assets you transfer into the trust (this is what makes the trust “defective”).

By paying the taxes during your lifetime, you’re making tax-free gifts to the trust, increasing its overall value while decreasing your taxable estate.

Marital Deductions

You can make unlimited transfers to your spouse or a trust for your spouse during your lifetimes. None of these transfers are considered gifts and none will be taxed.

There are also ways to set up a trust, also known as a spousal limited access trust (SLAT). This trust will be for the benefit of your spouse and your descendants, and be excluded from their estate upon their death. With the current high exemptions, it’s a way to transfer significant assets out of your estate but still provides benefits to your spouse.

Generation-Skipping Transfers

GSTs allow you to make a direct transfer of assets to your grandchildren (or individuals at least 37.5 years younger than you). This allows you to avoid doubling down on estate taxes, which can happen if your children inherit your estate and then your children’s estate ultimately passes to your grandchildren.

One major downside to generation-skipping trusts is generation-skipping transfer taxes (GSTTs). These taxes can be limited by instead implementing a dynasty trust, which is discussed below.

Dynasty Trusts

A dynasty trust allows you to protect your wealth for generations to come. Not only does this type of trust last for multiple generations, but it’s also nearly untouchable by irresponsible heirs, ex-spouses, creditors, the IRS, and other potential predators.

While the trust owns all the assets you transfer to it, this trust can be set up to benefit multiple generations.

Valuation Discounts

This particular wealth transfer planning applies when gifts of minority interests are made in limited liability companies (LLCs), family limited partnerships (FLPs) and some corporations.

Through the lack of marketability and minority valuation discounts, you may be able to lower the fair market value of the gifts, thereby lowering potential gift and estate taxes. A business valuation expert is imperative to handle this process well.

Start Your Gift & Estate Tax Planning Process Now

There’s no better time to craft your estate plan than right now. That statement is truer today than ever, in large part due to the impending changes involving the federal gift tax.

Don’t wait to take your next step toward effective and efficient gift and estate tax planning. Let the team at BGM guide and support your tax goals. Call us today at 952-844-2500 or send us a message to get started.