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Business owners may need to plan for estate tax risks

On Behalf of | May 30, 2024 | Estate Planning |

Even though most adults benefit from estate planning, some people have more of a need to engage in estate planning than others. Business owners typically fall into this category. After all, the company that they run could be at risk of dissolution or insolvency if they die without proper plans in place. The disputes that arise about company ownership and management could also negatively impact their surviving family members.

There are several means of addressing the future of a company. A succession plan helps ensure that there is a smooth transition to new leadership at the organization after an executive dies or has to step down due to medical challenges. They may also need to address the business itself in their estate plan.

Leadership and ownership interest can be completely separate at businesses, and the business’s owner may have specific parties who they want to leave the company to when they die. A successful business may require particularly careful planning by testators because its inclusion in an estate could lead to costly estate taxes.

A business’s value could lead to tax obligations

Technically, estate tax at the state level no longer exists in New Jersey. There is an inheritance tax that applies in some scenarios if beneficiaries do not have an exempt relationship with the deceased party leaving them an inheritance. Spouses, children, grandchildren and other immediate family members typically do not need to pay inheritance taxes.

However, if a business is valuable enough, it could lead to federal estate tax obligations. The current federal exemption level for income tax is $13.61 million. Any estate worth more than that is subject to a tax rate of between 18 and 40%.

Larger, successful businesses could very easily push an estate over that threshold and force the liquidation of certain assets to cover tax responsibilities. There are many ways to minimize or eliminate estate tax risks for business owners thinking about their legacies.

The type of company, the intended beneficiaries of the estate and a host of other details can influence the best estate tax strategy for business owners planning their estates. Understanding that estate taxes could be an issue can help business owners make the right arrangements for the protection of their resources.