Smart estate planning moves for business owners

Written by Mike McCarthy, CPA,CFP®, MST


This is the third in a series of articles explaining the importance of exploring estate planning strategies in anticipation of expected tax changes that could be enacted under the Biden administration. Be sure to also read our first two articles in the series, Proposed estate tax changes: prepare now to preserve your assets and A good estate plan starts with thorough documentation.

As a business owner developing or updating your estate plan, it’s essential to take personal and professional considerations into account. It’s a process you’ll likely undergo more than once as your plan evolves.

A good starting point is evaluating what you want to happen to assets from a non-financial perspective. Ask yourself questions such as, Which assets would best suit each beneficiary of your estate? Which beneficiaries are not interested in or able to operate a business after your death? Do you even want to plan for continued operation of the business after your death, or would it be in everyone’s best interests to dissolve the entity? Identifying your intentions helps determine the best planning strategies while simultaneously optimizing estate and income tax laws. Then, you’ll want to address the following in your estate plan:

  •  Business valuation. If your organization’s value is significant enough, it may create a tax issue for successors.
  • Expected growth in business value. Business value may grow substantially between the time your estate plan is created and date of death.
  • Division of business interests. Consider how you will you approach dividing business interests between beneficiaries if the value of your business is significantly higher compared to other estate assets.
  • Asset allocation. Your company is an illiquid asset in your estate plan. It’s wise to think through potential reactions among your beneficiaries who will receive either an illiquid or liquid asset.

A number of estate planning techniques can help mitigate these issues and deliver a solid estate plan that is effective in meeting your goals while achieving tax efficiency. Here’s an overview of some of the options we recommend you discuss in detail with your Rehmann advisors.

Give or sell business interests during your lifetime or after you pass away. The gift and estate tax exemption was raised to $11.4 million through 2025; a change proposed by the Biden administration could substantially lower the estate and GST exemption to $3.5 million and the gift tax exclusion to $1 million, per person. Owners of businesses above these thresholds may want to consider making substantial transfers now to take advantage of the current higher exemptions before they expire, especially if Biden administration tax plan changes are enacted.

Create a buy-sell agreement. This document determines what happens to the business if a specified event occurs, such as an owner’s retirement, disability or death, and can ensure beneficiaries of a deceased owner’s estate don't unintentionally become owners. It can also establish a floor sales price and a ceiling contingent sales price so that if the business does well in the years following the execution of the buy-sell agreement, the sales price increases. Another valuable tool for business continuity and valuation may be to incorporate language that gives current managers a right of first refusal to buy all or a portion of the business.

Establish deferred compensation provisions. These can provide pay for a long-time business owner for a set period of time, even if he or she is no longer actively engaged in operating the business. While this arrangement rewards the owner while still alive, it also lowers the value of the business. Although the payments are deductible by the business, deferred compensation is a liability and they could continue after the owner’s death if left to a beneficiary who is not a successor owner or manager.

Transfer your business into a trust. Doing this during your lifetime allows subsequent appreciation of trust assets to pass to beneficiaries outside of your taxable estate and provides valuable benefits during your lifetime. Trust options to consider:

  • Grantor Retained Annuity Trust (GRAT) pays the grantor a set amount each year.
  • Grantor Retained Unitrust (GRUT) pays the grantor an amount based on a percentage of the trust assets, which can fluctuate each year.
  • Intentionally Defective Grantor Trust (IDGT) utilizes provisions of estate and income tax law that allows a grantor to pay taxes on the income derived from trust assets, but the value of the assets and the value of the income on the assets is removed from the grantor’s taxable estate.

Factor in uncertainties, such as proposed tax law changes and other events both within and outside your control, and it’s clear the best estate plans are developed over time and remain agile to adapt to evolving circumstances.

Talk with your Rehmann advisor today for expert guidance on how combining business succession planning with estate planning is an efficient, effective approach to protecting your assets for generations.

You can learn more about planning opportunities by joining Rehmann’s Empowered Planning series of webinars, including a playback recording of the recent webinar, “Empowered Planning: Your Personal Financial Strategy.”

These complimentary webinars and Q&A sessions are taking place throughout this year and provide expert insight and real-time examples of organizations and individuals who are seeking to build and maintain a strong financial foundation during these changing economic times. Learn more about the series, which is focused on planning ideas to help you move forward confidently, at

Continue checking the Rehmann blog for upcoming articles in our estate planning series.

Published in Wealth Management

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