The recently passed “One Big Beautiful Bill Act” (OBBBA 2025), which permanently increases the federal gift and estate tax exemption to $15 million per person for 2026 (and $30 million for married couples, indexed for inflation), is a game-changer for business owners’ estate planning. This legislative certainty, replacing the looming sunset of the previous higher exemption, dramatically alters strategies that were previously driven by a sense of urgency.
Here’s how higher estate/gift tax exemptions will change how business owners plan:
- Reduced Urgency for “Use-It-or-Lose-It” Gifting (for some)
Previously, many business owners felt intense pressure to make large lifetime gifts before the end of 2025 to “lock in” the higher, temporary exemption amounts. With the permanent increase and continuous inflation indexing, this immediate urgency has subsided for many.
- Less Pressure to Gift Right Away: Owners whose estates fall comfortably below the $15 million (or $30 million for couples) threshold may no longer feel compelled to make significant taxable gifts solely for estate tax avoidance. Their estates may now pass entirely tax-free.
- More Flexibility: The pressure to rush valuations or transfer assets before year-end is largely gone. Business owners can now take a more measured approach to their wealth transfer strategies.
- Strategic Shift for Ultra-High Net Worth Owners
While the new exemption is substantial, it won’t eliminate estate tax for the wealthiest business owners. Those with estates significantly exceeding $15 million ($30 million for couples) will still face federal estate tax. However, the planning strategies evolve:
- Still Utilizing Full Exemptions: These owners will continue to maximize the use of their $15 million per person exemption through lifetime gifts. Gifting business interests, especially those with high growth potential, remains a powerful strategy to remove future appreciation from the taxable estate.
- Focus on Discounting and Growth Assets: The value of gifts is determined at the time of transfer. Business owners will continue to use valuation discounts (for lack of marketability and lack of control) when gifting illiquid, non-controlling interests in their businesses. This allows them to transfer a greater underlying value of the business while using less of their exemption. Gifting assets expected to appreciate significantly (like a growing business) remains a cornerstone of efficient wealth transfer, as all future appreciation occurs outside the taxable estate.
- Sophisticated Techniques Remain Relevant: Techniques like Grantor Retained Annuity Trusts (GRATs) and Sales to Intentionally Defective Grantor Trusts (IDGTs) will still be vital for freezing the value of appreciating business assets within the estate, transferring future growth tax-free to heirs, or creating liquidity for business succession.
- Increased Focus on Income Tax Planning
With less emphasis on estate tax for many, the spotlight shifts to income tax efficiency, particularly for business owners:
- Basis Planning: The new law might lead to a re-evaluation of gifting strategies versus holding assets until death to receive a “step-up in basis.” While lifetime gifts remove assets from the estate, the recipient receives the donor’s original (often low) cost basis, potentially leading to higher capital gains taxes upon sale. Assets held until death receive a basis stepped up to fair market value, potentially eliminating capital gains on appreciation. Business owners will weigh the benefits of future appreciation escaping estate tax vs. the potential for income tax on sale.
- Section 199A Deduction (Pass-Through Income): OBBBA 2025 also includes a permanent 20% deduction for qualified business income for owners of pass-through entities (S-corps, partnerships, LLCs). Business owners will meticulously plan their income structure to maximize this deduction, impacting decisions around entity choice and owner compensation.
- Depreciation and Expensing: The bill also includes provisions related to 100% immediate expensing for new equipment and enhanced R&D expensing, incentivizing business investment. This impacts cash flow and taxable income, which in turn influences the financial health of the business being planned for.
- Greater Emphasis on Business Succession & Control
With reduced estate tax pressure, business owners can place more focus on the non-tax aspects of succession planning:
- Orderly Transitions: The time and mental energy previously consumed by urgent tax planning can now be redirected to developing robust succession plans, identifying and training successors (whether family, management, or external), and structuring buy-sell agreements.
- Maintaining Control: Owners who wish to transfer wealth but retain control of their business for a longer period may find more flexibility. This could involve recapitalizing the business into voting and non-voting shares, using trusts where the owner retains certain powers, or implementing carefully drafted shareholder agreements.
- Philanthropic Planning: For business owners with significant wealth and charitable intent, the higher exemptions allow for more flexibility in integrating philanthropic goals into their estate plans without compromising transfers to family. Charitable giving strategies can still provide income tax deductions while reducing the taxable estate.
- Continued Importance of State-Level Planning
While the federal picture is clearer, state-specific estate and inheritance taxes remain a critical concern.
- State “Cliffs” and Exemptions: Many states have much lower estate tax exemptions (some with “cliff” provisions where exceeding the exemption by a small amount can make the entire estate taxable). Business owners in these states will continue to employ strategies like Spousal Lifetime Access Trusts (SLATs) or bypass trusts to maximize both spouses’ state exemptions and mitigate state-level tax exposure.
In summary, the higher, permanent federal estate and gift tax exemptions under OBBBA 2025 offer business owners unprecedented opportunities and flexibility. While it reduces the immediate urgency for some, it shifts the focus towards more strategic, long-term planning that integrates wealth transfer with income tax efficiency, robust business succession, and thoughtful control considerations. The role of experienced advisors, including tax lawyers and business valuators, remains paramount to navigate this evolving landscape.