Estate and Succession Planning: Eat the Elephant!

It is often said that business owners are too busy working IN the business to work ON the business. I certainly understand. Who gets to the end of their daily to-do list early in the afternoon and thinks, “I have too much time on my hands, what else can I add to my plate?” Anyone raising their hands? I didn’t think so!

As such, long-term goals are sometimes sacrificed for short-term goals and the daily grind. As the saying goes—How do you eat an elephant? One bite at a time—we are going to tackle estate and succession planning in a series of Our Thoughts On articles, designed to introduce the topic in small, bite-sized pieces. 

Let’s begin by making a distinction between estate planning and succession planning:

• The goal of succession planning is to determine how the company will continue once current business owners and/or key employees exit the business.
• Estate planning has the purpose of developing a plan for your personal assets (which include your ownership interest in the business) upon the occurrence of either death or incapacitation so that your assets are passed on according to your wishes in an efficient manner that minimizes taxes and other liabilities.

In a closely held business, estate and succession planning can overlap, but these are two distinct concerns that must be addressed.

One final word on the timing of estate planning. This is currently an excellent time to address estate planning since the current lifetime estate and gift tax exemption has an expiration date. In a nutshell, on the federal level, taxpayers can make annual gifts up to the annual gift tax exclusion, which is $16,000 per recipient in 2022 and will increase to $17,000 per recipient in 2023. In addition to the annual limits, a taxpayer may gift over that amount up to a lifetime gift and estate tax exemption, which is the total amount that you can transfer over your lifetime or your estate after your death without having to pay gift or estate taxes. The Tax Cuts and Jobs Act of 2017 (“TCJA”) temporarily boosted the lifetime exemption amount from $5.49 million to $10.98 million. Since it is indexed for inflation, the exemption is currently $12.06 million and will increase to $12.92 in 2023. For a married couple, that means that a combined exemption amount will reach $25.84 million in 2023. 

However, this TCJA provision is set to sunset at the end of 2025, meaning that the lifetime gift and estate tax exemption is set to be cut roughly in half beginning in 2026—or sooner depending upon what the politicians come up with next. (A version of the Build Back Better Act that was floated earlier this year included a provision to cut the exemption amount beginning in 2023, but this provision was not included in the final legislation.)

Therefore, unless further legislation is passed that either limits or extends the current lifetime gift and estate tax exemption, your ability to transfer assets in a tax-efficient manner may be significantly reduced within a few years. As such, now is an opportune time to consider forming an estate plan.

Estate and succession planning are key considerations for business owners and should be addressed years in advance in order to provide the greatest strategic benefit, to take advantage of changing tax laws and to be prepared for unforeseen circumstances.

Congratulations, you have finished the first bite! Stay tuned for additional posts in this series on estate and succession planning considerations.

About Schneider Downs Business Consulting

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