Navigating the Impending Changes to Estate and Gift Tax Exemptions

Estate and Gift Tax Exemptions

Possible End to an Era of TCJA?

At the end of 2025, significant tax cuts will expire that were passed under the Trump administration through the Tax Cuts and Jobs Act (TCJA), often called the Trump tax cuts. Unless a new law is passed to amend the tax code, tax rates in 2026 will return to what they were before the TCJA came to be.

What is the Federal Lifetime Estate and Gift Tax Exemption?

As the federal lifetime estate and gift tax exemption faces the potential sunset at the end of 2025, business owners must heed urgent appeals from financial experts. Why? Although it may seem distant and the appeals might feel like an overreaction, there is a valid reason to take action. If you are considering selling or transferring your business equity in the near future, these changes might dramatically alter the after-tax value. 

Why Prepare to Sell Now?

The current exemption of $12.92 million ($25.84 million for a married couple) will be cut in half on Jan. 1, 2026 – unless Congress intervenes. This should raise concerns for those contemplating selling or transferring business equity in the near term.

Keep in mind, a market has to be created to sell your privately held business. You can’t just click a button on E*Trade to sell your shares. The selling process takes approximately 9 to 12 months. Owners need to start having discussions with their advisors and planning NOW if they want to hit that December 31, 2025 deadline to maximize after-tax value.

Although selling a business is often seen as an event, it is a complex journey that demands time, proper planning, and expertise. Business owners must stay informed about the dynamic tax landscape to engage in effective planning. The process of transitioning business ownership involves emotional complexities, with multiple factors influencing your company’s valuation and, consequently, the success of the transaction.

The potential reduction in the estate and gift tax exemption could impact the financial outcomes of transactions, making it essential to consider tax-efficient strategies and consult with advisors to mitigate or at least plan for potential tax liabilities.  

Key Suggestions to Mitigate Impact

  1. Recognize the Reality:

The looming threat to halve the estate and gift tax exemption is genuine. Unlike past legislative procrastination, the IRS and Treasury are prepared, making it crucial for business owners to take proactive steps.

  1. Involve Family and/or Key Personnel Early:

Early involvement of family members and key personnel is vital in decision-making. Open and transparent communication about business plans and ownership transfer helps manage expectations, avoid conflicts, and reduce deal friction.

  1. Explore Various Transaction Forms:

Business transactions triggered by the potential exemption sunset can take diverse forms, including outright sales, equity transfers to families, management buyouts, and minority investments. Business owners have options beyond relinquishing total control.

  1. Prioritize Estate Tax Planning:

Business owners must act promptly to navigate the evolving landscape of estate and gift tax exemptions. Initiating discussions, involving family, key personnel, and estate tax planning advisors to explore transaction options is crucial. The ticking clock emphasizes the urgency to start planning now to execute tax-saving strategies.

Take the Next Step: Understand Your Options

As an owner, understanding your options is essential,  especially during ownership transitions. As market dynamics change – as well as laws and regulations – it’s critical to align with a bench of experts who have your back. 

Through M&A, REAG educates and prepares entrepreneurs for financial prosperity, serving as a dedicated and collaborative advisory partner to navigate transactions and ensure an efficient, successful process.

If you are ready for the next chapter of your entrepreneurial journey or want to learn more, reach out. Let’s begin together.