Implications of Federal Tax Proposals on Business Succession Strategies

New federal tax proposals present far-reaching implications for many business owners. Business owners thinking about succession strategies are especially impacted by the current proposals in two major ways.

First, the proposed reduction of the federal estate tax exemption from $11.7 million/person to $5 million/person adjusted for inflation (which results in an exemption of approximately $6 million/person) impacts anyone considering a succession strategy which includes gifting. The current, higher exemption was scheduled to sunset on December 31, 2025 but the new proposals accelerate this reduction to December 31, 2021. Business owners who contemplate transfers to a child or other family member frequently facilitate such transfers by gifting ownership of their company or assets utilized by the company. A reduction in the estate tax exemption means business owners who have not utilized their higher, $11.7 million, exemption will lose that opportunity at the end of this year.

Second, attacks on the use and utility of intentionally defective grantor trusts (“IDGT”) are also in the recent proposals. IDGTs have historically been used as gifting vehicles by individuals (grantors) who wish to transfer assets outside of their taxable estates (by gift or by sale) while (1) retaining the income tax liability associated with the assets transferred, and (2) ensuring an appropriate management structure within the terms of the IDGT. The new proposals essentially remove current utility of IDGTs by requiring that grantor trusts be included in the taxable estate of the grantor. Unfortunately, the proposed effective date for the grantor trust rule changes is the date of enactment which is likely to be sooner than December 31, 2021.

If you are a single business owner with total assets over $6 million or a married business owner with total assets over $12 million, you should consult with your advisors about whether you need to take action now.