There are many factors—both financial and personal—to consider when crafting a business transition. Among the financial factors is taxation, and one element of taxation that few owners have had to consider since 2018 is the effect of federal estate taxes on business transitions.
Currently estates of less than $12.92 million (or $25.84 million for a married couple) pay no federal taxes. As of January 1, 2026, however, and unless Congress acts, the exemption level falls to approximately $5 million, as adjusted for inflation. Double that for married couples.[1]
The value of many of our clients’ businesses combined with their other investment assets exceeds $5 million (after tax), so the visionaries among them are already considering how this tax change affects their business transition plans.
The Big Six™
I’ve written before about one way we organize the transition process, namely The Big Six™. Each of The Big Six questions—Why, What, Who, When, How Much and How— represents a category of planning questions that owners must answer before or during their transition journeys.
Owners typically jump to How Much and, just as typically, become stuck. When we work with owners, however, our first question is Why? Why are you transitioning your company? Put another way, what are your goals for the transition of your company to a new owner? Knowing what you want to accomplish provides a standard by which you can answer the other five questions.
Estate Taxes and Business Value
If your estate includes an illiquid asset like your business, your heirs will need cash to pay federal tax on the value of that asset that exceeds the exemption amount. If they, or your company, cannot come up with that cash in a relatively short period of time, your heirs may have to sell the business simply to pay the tax. If the IRS is willing to allow the company to pay taxes over time, the company’s lifeblood—cash flow—is diverted to pay that liability. We’ve yet to meet an owner who wants to put heirs or their companies in this position.
A thoughtful transition plan can include strategies designed to avoid placing this heavy financial burden on heirs and the companies that owners leave behind. In fact, transition planning:
- Meets an owner’s most important goals,
- Enhances the probability of success for the people owners care most about: successors and heirs.
- Leaves successors and companies positioned for continued success.
The Effect of Federal Estate Taxes on Business Transitions
Owners who want to achieve their business transition goals in the face of a potential increased estate tax liability, can begin creating their transition plans well before 2025. Part of planning involves evaluating their preferred successor, and assessing the impact a tax change would have on their successors. Based on that analysis, owners can proactively set or adjust their exit timetables. It takes time to set goals, create a transition strategy, train a successor, and transfer ownership. It also takes time to consider new options in the face of tax law changes.
With the clock ticking toward January 1, 2026, savvy owners are meeting today with their advisors and taking action. In our work as transaction strategists, we collaborate with family dynamics, estate and tax planning professionals so that our clients can assess and address the effect of federal estate taxes on business transitions. If the after-tax value of your estate— including your business—is or could exceed $5 million on January 1, 2026, we urge you to do the same.
As transition strategists, we are not attorneys or tax experts, but we work every day with business owners who are engaged in or thinking about the transition of their businesses to successors.
Elizabeth Ledoux is a co-author of the award-winning It’s A Journey: The MUST-HAVE Roadmap to Successful Succession Planning, as well as Accelerate Your Entrepreneurial Flight and Understanding the Growth of the Entrepreneur. She frequently speaks to organizations and business owners about challenges and opportunities in private and family business transitions, business and individual growth, and the business succession journey.
[1] https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-estate-taxes
