When a small business owner begins planning how to pass their business and wealth to their loved ones, one consideration they must address is estate taxes. Without careful legal and financial planning, a successful small business owner may see their family wealth reduced by estate taxes.
Understanding Estate Taxes
Estate taxes are taxes levied upon an estate following an individual’s death. The government calculates estate taxes based on the value of an individual’s estate at the time of their death. The personal representative of the decedent’s estate must file an estate tax return and pay any taxes owed by the estate. Estate taxes differ from inheritance taxes, which are taxes owed by an heir or beneficiary of an estate based on the value of their inheritance.
The federal government imposes estate taxes. However, federal tax law provides individuals with a lifetime gift and estate tax exemption. As of 2025, an individual has a lifetime exemption of $13.99 million, reduced by any lifetime gifts made to a person over the annual gift tax exemption. Individuals can also assume the unused portion of their deceased spouse’s lifetime exemption. California does not impose estate or inheritance taxes; however, a decedent may own assets in states that do levy these taxes.
Why Estate Taxes Matter for Small Business Owners
Estate taxes can matter to successful small business owners as the value of their business interests can place their estate above the federal estate tax threshold. A small business’s assets, including real estate, equipment, inventory, intellectual property, accounts receivable, and goodwill, can lead to a high business valuation, which in turn increases the value of the business owner’s estate. However, this financial situation may lead small business owners to become “asset rich, cash poor,” leaving their families unable to pay estate taxes without liquidating important assets, such as family residences or business assets. Failing to address taxes during estate planning risks disrupting the owner’s business upon their death
Strategies for Managing Estate Taxes
Common strategies used by small business owners to manage estate tax burdens include:
Valuation Discounts – Small business owners may take lack-of-marketability discounts to reduce the value of their business and the total value of their estate.
Gifting Strategies – Owners can reduce their estate’s value through gifting strategies that leverage annual gift tax exclusions and lifetime gift and estate tax exemptions to pass family wealth to loved ones.
Trusts – Various types of irrevocable trusts can help transfer family wealth in a tax-efficient manner.
Family Limited Partnerships – Small business owners can place their business interests in a family limited partnership to facilitate the transfer of ownership and control of the business from one generation to the next.
Buy-Sell Agreements – Small business owners with partners may develop buy-sell agreements to facilitate the sale of a retired, disabled, or deceased partner’s interest and determine the business’s value.
Life Insurance – Life insurance policies can provide financial resources to a small business owner’s heirs and beneficiaries to cover potential estate tax liabilities.
The Importance of Estate Planning
Comprehensive estate planning can help you manage estate tax burdens and safeguard your business and family wealth. Experienced estate planning lawyers, accountants, and financial advisors can assist you with developing tailored legal and financial strategies to minimize taxes from business succession or distributing your estate after your death. Furthermore, estate planning for small business owners should occur throughout an owner’s career and life to address financial, personal, and legal changes that might make an estate plan outdated.
Contact an Estate Planning Lawyer
If you own a small business, careful estate planning can help you minimize the effect of estate taxes on the wealth you leave to your loved ones. Contact Heritage Legal today for a confidential consultation with an estate planning attorney for legal advice regarding the potential effect of taxes on your estate.