As a business owner, you work hard to build something meaningful—not just for yourself, but for your family and future generations. But without careful planning, a significant portion of your legacy could be lost to estate taxes. Effective estate planning can help preserve your wealth and ensure a smooth transition of your business assets.
In this guide, we’ll break down how strategic estate planning can reduce tax exposure and protect what you’ve built.
Why Estate Planning Matters for Business Owners
Unlike individuals with primarily personal assets, business owners face unique challenges:
- A business may make up the majority of your estate’s value.
- Ownership interests can be difficult to value or transfer.
- Without planning, your business could face liquidity issues upon your death.
- Federal and state estate taxes can create sudden financial burdens for your heirs.
Estate planning helps ensure that your business and other assets are passed on in a tax-efficient, legally sound manner.
1. Use of Trusts to Reduce Taxable Estate
Placing assets—including business interests—into certain types of trusts can reduce your taxable estate. Common strategies include:
- Revocable Living Trusts – Useful for avoiding probate but don’t reduce estate taxes. Often used in combination with other tools.
- Irrevocable Life Insurance Trusts (ILITs) – Keep life insurance proceeds out of your estate while providing liquidity to your heirs.
- Grantor Retained Annuity Trusts (GRATs) – Transfer appreciating assets to beneficiaries with minimal gift tax.
- Intentionally Defective Grantor Trusts (IDGTs) – Useful for freezing the value of your estate while shifting growth to beneficiaries.
2. Business Succession Planning
Without a clear plan, business interests may be subject to forced liquidation or heavy taxes. A good succession plan can:
- Establish how ownership is transferred (e.g., family, partners, key employees).
- Incorporate buy-sell agreements to define sale terms and values.
- Coordinate with life insurance to provide funds for buyouts or tax obligations.
- Minimize transfer taxes through gradual gifting or trust strategies.
3. Annual Gifting and the Lifetime Exemption
The IRS allows individuals to gift up to a certain amount each year per recipient without triggering gift taxes (the annual exclusion, which is $19,000 per recipient in 2025). Over time, this can significantly reduce the size of your taxable estate.
You can also use your lifetime gift and estate tax exemption (currently over $13.99 million per individual in 2025) to transfer larger portions of your business, but it requires careful documentation and valuation.
4. Valuation Discounts for Business Interests
When transferring interests in a closely held business, you may be able to apply valuation discounts for:
- Lack of marketability – It’s harder to sell a share in a private business.
- Lack of control – A minority interest is worth less than a controlling one.
These discounts can reduce the taxable value of the transferred interest, lowering gift or estate taxes.
5. Planning for Liquidity
Estate taxes are typically due within nine months of death. If your estate is tied up in illiquid business assets, this can create problems. Planning ahead can include:
- Using life insurance to cover estate tax obligations.
- Establishing a business entity structure that allows for smoother transitions.
- Creating cash reserves or funding trusts to manage tax liabilities.
Final Thoughts
Every business owner’s situation is different. That’s why personalized estate planning is critical. By working with experienced estate planning attorneys who understand both family dynamics and business structures, you can create a plan that minimizes taxes and maximizes peace of mind.
