Role of estate taxes in succession planning

Estate taxes often come up when talking with business owners and other clients as they think about retirement and leaving the business. The sale of the business translates the owners’ biggest asset into cash. The dollars can be considerable and it follows that the taxes on the sale, and ultimately their estate, can likewise be substantial. Concerns about taxes are valid. Currently, the threshold for an estate tax is an estate value of $5.49 million for a single person. If married, the exemption amount of the first-to-die flows to the survivor so the total exemption is doubled to $10.98 million. Once the total estate value exceeds the respective levels, the tax rate of up to 40% kicks into effect.

The estate tax was a hot topic throughout and after the election. In the past weeks, President Trump and the Republican Party announced that they were beginning to work on their new tax plan.

This news brought a client who we will call “Joe” to mind. Joe was very excited right after the election about the prospect of the estate tax being repealed. He was pumped and confident that the death of the estate tax was just a matter of time. He halted all conversations about the sale of his business until legislation was passed.

For Joe, the fact that the estate tax was (theoretically) going to be repealed took care of his succession planning needs. He didn’t worry about transitioning his ownership interests because it was just going to the kids anyways. Succession planning is only equated to tax planning in his mind. Now that taxes would be gone, the need to strategize about when and how to sell the business was simplified tremendously. The conversation was now stalled.

This is a classic case of the tail wagging the dog. Joe was missing the fact that there are other elements to consider and decisions to be made, including:

  • What are your true bequeathing wishes? That is, if your entire estate were liquid and net of any tax obligation, how would you like it distributed among your children and/or other heirs?
  • Who should (and should not) inherit the business? What’s fair? What makes sense for the family? For the business?
  • If there are multiple children, should the allocation of the business interests be equal?
  • If yes, do all the children want to be shareholders? Does this create other issues or unintended consequences?
  • If the business interests are not divided equally, how will they be allocated? What rationale supports this approach?
  • How will the other non-business assets be distributed?
  • Are there sufficient assets outside the business to allow for an equitable estate distribution to all the children? (Admittedly, this assumes you want it to be an equal split.)
  • Is this articulated in the owner’s last will and testament, and supported by a current buy-sell agreement?
  • Can the business or the other shareholders come up with the money to pay out the estate?
  • Is the business going to have to be sold to fund the liquidity to the estate?
  • Is the business in an optimum condition to be sold should the estate or family want or need to? (Far too many are not.)

The list goes on.



Like the family we talked about in my last blog, Joe has multiple generations and interests involved in his company. They have different levels of participation, vastly different priorities, and potentially damaging dynamics.

Rather than considering and integrating the above issues into his plan and discussions with his family, Joe equates succession and estate planning with minimizing estate tax. In this regard Joe, who has otherwise built a great family and wealth for them, has failed his family in a colossal way.  Taxes are important, but other things — like family — are more important.

For example, have you experienced the loss of a parent or watched a loved one navigate this loss? If yes, you’ve witnessed the impact that the directives of a will can have on a family. How assets are divided delivers a resounding message to the survivors in a family. It conveys a powerful message of love and care, or creates chaos, bickering, and unresolvable hurt.

Your loved ones deserve your careful planning. Taxes are only one small piece of the equation. That’s not to say that they should not be considered. They should be and your tax advisor should be in the loop on your plans. However, pushing off your succession and estate planning just because the tax law may change is not wise.

Words of advice: Don’t wait for Washington to act. It’s up to you to act and plan for the transition of your business and your wealth in a manner that conveys the legacy that is most important to you and your family. Plan with what you know today. Act and align your plans with what is important to you and what you want for your family. Factor in tax implications but don’t let taxes drive your decisions. If pigs take wing and the estate tax goes away, your plans can be updated. Really, Joe — I promise.

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