Estate Tax Planning for Small Business Owners

By Yarik Yarosh, CPA ·September 5, 2026 ·Updated September 23, 2026 ·8 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

Estate tax planning isn’t just for the ultra-wealthy. A small business owner with a profitable S-Corp, commercial real estate, retirement accounts, and a home can easily have a total estate value of $5-$15 million. Under the current $13.99 million exemption (2025), this estate pays no federal estate tax. But the TCJA doubled exemption is scheduled to sunset after December 31, 2025, dropping the exemption to approximately $7 million (indexed for inflation). Under the OBBBA (One Big Beautiful Bill Act), the exemption has been extended, but the political landscape could change the timeline. Planning now gives the business owner options regardless of what Congress does.

✓Key takeaway

Estate tax fundamentals for business owners:

Current exemption (2025):

$13.99 million per individual
$27.98 million per married couple (with portability)
Tax rate on amounts above the exemption: 40%
State estate taxes: varies (12 states + DC have a state estate tax with lower exemptions, often $1-$5 million)

TCJA sunset (scheduled for 2026, but watch legislation):

Exemption drops to approximately $7 million per individual (indexed for inflation)
A married couple with a $15 million estate would owe approximately ($15M - $14M) x 40% = $400,000 in federal estate tax under the reduced exemption
Gifts made while the higher exemption is in effect aren’t clawed back (IRS anti-clawback regulation, TD 9884)

What counts in the estate:

Business interests (S-Corp stock, LLC membership interests, partnership interests): valued at fair market value, often requiring a formal business valuation
Commercial real estate: appraised value
Personal real estate: appraised value
Retirement accounts (401(k), IRA, SEP): full balance (no income tax deduction for the estate, and the beneficiary owes income tax on distributions)
Life insurance: the face value of any policy the decedent owned or controlled (even term life)
Investment accounts, bank accounts, vehicles, personal property

Business valuation discounts:

Minority interest discount: a less-than-50% interest in a business is worth less than the pro-rata share because the holder can’t control the business. Discounts of 15-35% are common.
Lack of marketability discount: interests in private businesses aren’t liquid (can’t be sold on an exchange). Discounts of 10-25% are common.
Combined discount: a 30% minority + 20% marketability discount on a $5 million business interest = valuation of approximately $2.8 million for estate tax purposes
The IRS challenges aggressive discounts; the discount must be supported by a qualified business valuation

Key planning tools:

Annual gift exclusion. $18,000 per recipient per year (2024). A business owner can gift $18,000 in business interests to each child every year without using any of the lifetime exemption.
Lifetime gift exemption. The estate tax exemption and gift tax exemption are unified. Gifts during life that exceed the annual exclusion reduce the estate tax exemption dollar-for-dollar.
Irrevocable life insurance trust (ILIT). Removes the life insurance policy from the taxable estate. The ILIT owns the policy, and the death benefit passes to the trust beneficiaries outside the estate.
Grantor retained annuity trust (GRAT). Transfers future appreciation on business interests out of the estate. The grantor retains an annuity for a term of years; the remainder passes to the beneficiaries estate-tax-free.
Family LLC/LP. Transfers business interests to family members at discounted values (minority + marketability discounts).
Buy-sell agreement. Fixes the price at which a deceased partner’s interest is purchased, funded by life insurance. Prevents valuation disputes and provides liquidity.
IRC 6166 installment deferral. If the business represents more than 35% of the estate, estate taxes can be deferred for up to 5 years (interest-only) and then paid in installments over 10 years. The interest rate on the first approximately $1.8 million of deferred tax is only 2%.
Stepped-up basis at death. Assets included in the estate receive a basis adjustment to FMV at the date of death. This eliminates all unrealized capital gains. A business interest with a $500,000 basis and $5 million FMV at death passes to heirs with a $5 million basis.

How does estate tax planning work for a $10 million estate?

Hypothetical example

Round numbers. For current guidance, see IRS estate and gift tax overview. A business owner (married) with the following assets:

S-Corp business interest: $4,000,000 (based on a business valuation)
Commercial building (owned personally, leased to the S-Corp): $2,000,000
Personal residence: $800,000
Retirement accounts (401(k) + SEP): $1,500,000
Life insurance (term, owned personally): $1,000,000
Investment accounts and savings: $700,000
Total estate: $10,000,000

Under current exemption ($13.99M per person, $27.98M per couple):

Estate tax: $0 (estate is below both individual and couple exemptions)
No planning required to avoid federal estate tax

Under reduced exemption ($7M per person, $14M per couple):

Taxable estate: $10,000,000 - $14,000,000 = ($4,000,000) below exemption
Still no federal estate tax (the couple exemption is sufficient)

But what if the business grows? If the S-Corp doubles in value over 10 years (from $4M to $8M) and the commercial building appreciates to $3M:

Updated estate: $15,200,000
Under reduced exemption: $15,200,000 - $14,000,000 = $1,200,000 taxable
Estate tax: $1,200,000 x 40% = $480,000

Planning to eliminate the $480,000 tax:

Step 1: Move life insurance to an ILIT.

Transfer the $1,000,000 term policy to an irrevocable life insurance trust
The policy’s death benefit is removed from the taxable estate
Updated estate: $14,200,000
Taxable: $200,000
Tax: $80,000

Step 2: Annual gifts of business interests.

Gift $18,000 per child per year (assume 2 children, 2 spouses = 4 recipients)
$18,000 x 4 = $72,000/year x 2 (both spouses gifting) = $144,000/year
Over 10 years: $1,440,000 removed from the estate
Updated estate: $12,760,000
Taxable: $0 under the couple exemption

Step 3 (if the business grows faster than expected): GRAT.

Transfer $2,000,000 in S-Corp stock to a 5-year GRAT
The grantor receives annuity payments that return the original $2,000,000 (approximately, based on the Section 7520 rate)
Any growth above the 7520 rate passes to the beneficiaries estate-tax-free
If the S-Corp stock grows 8% per year during the GRAT term: approximately $500,000 in appreciation passes tax-free

Total estate tax after planning: $0

State estate tax: If the couple lives in a state with a $5 million estate tax exemption (e.g., Oregon, Massachusetts):

State taxable estate: $10,000,000 - $5,000,000 = $5,000,000
State estate tax: approximately $400,000-$500,000 (state rates vary, typically 10-16%)
The ILIT and gifting strategies help reduce the state estate tax exposure as well

Illustrative numbers only, not a real client and not advice for your facts.

How do valuation discounts work for family business transfers?

When transferring a minority interest in a closely held business to family members, the fair market value can be reduced by a lack-of-control discount (typically 15-40%) and a lack-of-marketability discount (typically 15-35%). These discounts reflect that a minority, non-publicly-traded interest is worth less than its proportional share of the total business value because the buyer can’t control operations or easily sell the interest. The combined effect can reduce the taxable value of a transfer by 25-50%, significantly lowering gift and estate tax exposure. The IRS frequently challenges aggressive discount claims, so a qualified business appraiser’s report is essential to defend the valuation. Proposed regulations have periodically targeted family entity discounts, but as of current law, they remain available when properly documented.

Should I use a revocable or irrevocable trust for estate planning?

A revocable living trust avoids probate and provides management continuity if you become incapacitated, but offers no tax benefits because the assets are still in your taxable estate. An irrevocable trust removes assets from your estate, potentially reducing estate tax, and can protect assets from creditors. The trade-off is control: you cannot easily modify or revoke an irrevocable trust. For most small business owners below the estate tax exemption ($13.61 million in 2024), a revocable trust paired with proper beneficiary designations is sufficient. Business owners above the exemption (or expecting to exceed it before the 2026 sunset) should consider irrevocable structures like GRATs, SLATs, or intentionally defective grantor trusts.

Related guides:

How does the lifetime gift and estate tax exemption work for business owners?

The combined lifetime gift and estate tax exemption for 2025 is $13.99 million per individual ($27.98 million for married couples), meaning you can transfer this amount during life or at death without owing federal gift or estate tax. Gifts to individuals up to the annual exclusion ($19,000 per recipient for 2025) don’t count against your lifetime exemption and don’t require a gift tax return. The current elevated exemption is set to sunset after 2025 under the Tax Cuts and Jobs Act, potentially dropping to approximately $7 million (indexed for inflation), which creates urgency for business owners to lock in transfers at today’s higher levels. Transferring discounted interests in a family business entity (LLC or FLP) can leverage the exemption because valuation discounts for lack of marketability and lack of control can reduce the taxable value of the transferred interest by 25-40%.

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Cite this page

Yarik Yarosh, CPA. "Estate Tax Planning for Small Business Owners." Blue Cloud CPA, September 5, 2026, updated September 23, 2026. https://bluecloudcpa.com/guides/small-business-estate-tax-planning-basics

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.