Maximizing Opportunities Under Current U.S. Estate and Gift Tax Laws
As 2025 approaches, a significant change looms on the horizon for U.S. estate and gift tax laws. Currently, individuals enjoy historically high lifetime estate and gift tax exclusions—$12.92 million per person in 2023. However, these thresholds, established under the Tax Cuts and Jobs Act of 2017, are set to revert to pre-2018 levels (adjusted for inflation) on January 1, 2026. This reduction could slash the exclusion amount by nearly half, potentially back to around $6 million.
For high-net-worth individuals, business owners, and families, the current environment presents a fleeting but golden opportunity to transfer wealth to future generations in a tax-efficient manner. However, seizing this moment requires strategic planning—and accurate business valuations play a pivotal role.
The Pending Sunset of Higher Lifetime Gift Limits
The estate and gift tax exclusion allows individuals to transfer assets, either during their lifetime or upon death, without incurring federal estate or gift taxes up to the exclusion limit. In 2024, a married couple can transfer nearly $26 million free of federal tax. However, unless Congress acts to extend the current rules, the exclusion amounts will drop to approximately $12 million per couple in 2026.
For families with substantial wealth tied up in private businesses or other illiquid assets, this change could significantly increase future estate tax liabilities. Once the higher limits expire, transferring the same amount of wealth could trigger substantial tax bills, eroding the value passed to heirs.
Why Timing Matters
To take advantage of the higher exclusion limits before they expire, individuals must make gifts by the end of 2025. However, large-scale gifting of business interests or other complex assets isn't as simple as writing a check. The IRS requires clear documentation of the fair market value of the transferred assets to ensure proper compliance with tax laws. This is where a robust business valuation becomes essential.
Without a credible valuation, gifts of private business interests are vulnerable to IRS scrutiny, leading to potential disputes, penalties, or adjustments. A well-supported valuation provides a defensible basis for the reported gift value, mitigating these risks.
The Role of Business Valuations in Tax-Efficient Wealth Transfers
Business valuations are particularly valuable when transferring interests in closely held companies, family-owned businesses, or partnerships. Properly conducted valuations can:
- Determine Fair Market Value: A valuation establishes the fair market value of the business or business interest, ensuring compliance with IRS guidelines.
- Identify Discounts for Minority Interests or Lack of Marketability: When transferring partial ownership interests, qualified valuations can apply discounts for lack of control or marketability, reducing the taxable value of the gift.
- Support Long-Term Tax Planning: Beyond the current window of higher exclusions, valuations provide a foundation for ongoing estate planning strategies, such as grantor retained annuity trusts (GRATs) or family limited partnerships (FLPs).
Whitehawk’s Experience in Supporting Private Business Owners
At Whitehawk, we understand the complexities and nuances involved in wealth transfer strategies for private business owners. We have extensive experience delivering defensible business valuations tailored to estate and gift tax planning. Over the years, we have helped clients leverage favorable tax laws to secure their family legacies while minimizing tax burdens.
For example, we’ve assisted private company owners and investors in valuing businesses ranging from <$1 million to over $1B in annual revenues, working closely with their legal and financial advisors. By accurately valuing closely held businesses and applying appropriate discounts, we’ve enabled clients to maximize the impact of their gifts while satisfying IRS requirements.
The High Stakes of Inaction
Failing to act before the 2025 deadline could mean losing out on millions of dollars in tax savings. If the lifetime exclusion amount is halved, business owners who delay their gifting strategies may face significantly higher tax liabilities in the future. For example, gifting a $10 million business interest today could be entirely tax-free, but after 2025, the same gift could result in millions in estate or gift taxes.
In addition, waiting until the last minute can lead to rushed decisions and limited access to qualified professionals. Obtaining a comprehensive business valuation, for example, can take up to a month, depending on the complexity of the business. Starting early ensures that the valuation and transfer strategies are completed well before the deadline.
Next Steps for Business Owners
For private business owners and high-net-worth families, now is the time to take proactive steps to safeguard your legacy:
- Engage Experienced Professionals: Work with qualified business valuation experts, estate planning attorneys, and financial advisors to develop a comprehensive wealth transfer plan.
- Conduct a Business Valuation: Obtain an accurate and defensible valuation of your business or other illiquid assets to establish fair market value and identify potential discounts.
- Act Before the Deadline: Implement gifting strategies well in advance of the 2025 deadline to ensure compliance and avoid last-minute complications.
Conclusion
The temporary increase in the lifetime estate and gift tax exclusion provides a rare window of opportunity to transfer significant wealth without incurring federal taxes. By acting now, private business owners can leverage defensible valuations to optimize their gifting strategies, secure their family’s financial future, and preserve their legacy for generations to come.
At Whitehawk, we specialize in helping business owners navigate these complex decisions with confidence. Contact us to learn how we can assist you in making the most of this unique moment in tax law.
Get Started Today
Take the first step toward securing your family’s legacy. Contact Whitehawk Advisory for expert guidance and trusted valuation services tailored to your needs.
