Estate Tax Planning for Business Owners: Lifetime Exemption, Family Limited Partnerships, GRATs, and Succession

A business owner who builds a company worth $20,000,000 and dies without estate planning will leave their heirs with a federal estate tax bill of approximately $2,404,000 (40% on the amount above the $13,990,000 exemption), plus state estate taxes in states that impose them. For larger estates, the combined federal and state tax can consume 45-50% of the value above the exemption. The estate tax is due nine months after death (with a six-month extension available), and closely held businesses are notoriously illiquid, meaning the estate may need to sell the business at a distressed price or borrow against it to pay the tax. Under IRC 2001, the estate tax applies to the worldwide assets of U.S. citizens and residents at a flat 40% rate on amounts above the lifetime exemption. The lifetime exemption ($13,990,000 per person in 2025, now permanent under OBBBA) can be used during life (as a gift tax exemption) or at death (as an estate tax exemption), and IRC 2010(c)(4) allows a surviving spouse to use any unused portion of the deceased spouse’s exemption (portability), effectively doubling the exemption to $27,980,000 for married couples.

How should business owners plan for estate taxes?

What are the tax differences between a cross-purchase and entity redemption buy-sell agreement?

In a cross-purchase agreement, the remaining owners buy the departing owner’s interest directly, and each buyer gets a stepped-up basis in the purchased interest equal to what they paid. In an entity redemption, the business itself buys back the departing owner’s interest, which means the remaining owners don’t get a basis step-up (their percentage ownership increases but their basis stays the same). Cross-purchase agreements funded with life insurance can become unwieldy when there are many owners (each owner needs a separate policy on every other owner). Entity redemptions are simpler administratively but can trigger the accumulated earnings tax if the corporation retains excess funds for the anticipated buyout. For S-Corps, redemptions that don’t completely terminate a shareholder’s interest are treated as distributions (potentially taxable as dividends from accumulated E&P), not as sales, which can produce unfavorable tax results.

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