Preparing for the Sunset: Estate Tax Changes
Written by: Megan Ramey, CPA, CFF, ABV
Making a large financial gift can be extremely rewarding. There are many compelling reasons to make financial gifts during your lifetime if you have both the capacity and the desire to give. Gifting is also a powerful tool to consider for estate planning and tax savings. Not only can it reduce the size of your taxable estate, but it can be used to provide financial assistance to family members and loved ones.
In 2017, The Tax Cuts and Jobs Act (TCJA) significantly changed the federal estate and gift tax system in the United States. One of the most substantial changes was that the TCJA nearly doubled the lifetime estate and gift tax exemption from its previous levels. For 2024, the exemption stands at $13.61 million per person and $27.72 million for a married couple. Lifetime estate and gift tax exemption thresholds are poised to be cut in half beginning January 1, 2026, leading to a potentially sharp jump in some estates’ tax liability. But there’s still time to prepare.
An ownership interest in a closely held business can and may be the most significant asset in an estate. In many cases, business owners have nearly all their personal net worth tied up in their companies, a factor that can complicate estate planning. If you’re a business owner, you can take advantage of the current lifetime exemption limit by gifting an ownership interest in your business. This could be a percentage of ownership, shares, etc. To do that, the IRS requires a business valuation to accompany the gift tax return. Any valuation report, whether it is for an estate tax filing or for a gift, is subject to IRS review and must meet the requirements of being a “qualified appraisal.”
A valuation can also help you determine the value of your business for other purposes as well, such as a potential sale, shareholder buy-sell agreements, internal planning purposes, and many other reasons. A valuation report can provide you with an independent view of the worth of your business, including identifying strengths, weaknesses, and growth potential.
Depending on the circumstances and the ownership interest being transferred, certain discounts may apply, which can reduce taxable value. Common discounts include a discount for lack of control and a discount for lack of marketability. In doing so, business valuators can utilize the allowable discounts and, in many cases, allow for a sizable reduction in the taxable value of the interest being gifted or valued for estate and/or gift purposes, which can lead to significant tax savings.
As the 2026 tax sunset approaches, there is a significant surge in demand for business valuation services within the realm of gift and estate tax planning because of the “use it or lose it” rules of the higher tax exemption thresholds. With these upcoming changes on the horizon, now is the time to begin planning and executing 2024 and 2025 estate and gift tax moves. Gift and estate tax attorneys are, or should be, working quickly to help their high-net-worth clients take advantage of the higher tax exemption thresholds before the 2026 sunset.
Planning an estate is a complicated but essential process. With our 30+ years of experience at Cogence Group, we are eager and ready to help you determine the worth of your most valuable assets. To learn more about our services and discuss your estate and gift planning needs, contact us today!