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Most small business owners spend years building a business, optimizing tax structures, and accumulating retirement savings. Then they leave estate planning for later. The problem is that “later” usually means decisions get made by the IRS, state probate courts, and family members under stress, instead of by you. A working estate plan also has tax consequences during your lifetime, especially around gift tax and income-in-respect-of-a-decedent rules. Here is the 2026 framework.
Three factors make estate planning more complicated for business owners than for typical W-2 households: business ownership interests are illiquid (you cannot just sell half), business succession requires advance planning (the IRS has rules about valuation discounts and gifting), and concentration in a single asset makes the estate tax exemption math different.
Without a plan, the most common outcomes are: the surviving spouse inherits an operating business they have no role in running, multiple children inherit partial interests that can deadlock decision-making, the estate has to liquidate the business under pressure to pay federal estate tax (if the estate exceeds the exemption), or the family business changes hands through state probate court in a public process that can take 12-24 months.
The federal estate tax exemption for 2025 is $13.99 million per individual ($27.98 million per married couple with portability). The 2026 amount is indexed for inflation and announced by the IRS each fall — check irs.gov for the current year.
Important context: under the 2017 Tax Cuts and Jobs Act (TCJA), the elevated exemption is scheduled to sunset at the end of 2025, returning to roughly $6-7 million per individual in 2026 (indexed). Congress has the option to extend or modify this before sunset. For business owners with estates approaching the current exemption, the next 1-2 years are a critical window for using the higher exemption while it lasts.
Estates above the exemption are taxed at 40% on the excess. State-level estate or inheritance taxes apply in 17 states plus DC, with thresholds typically much lower than the federal exemption.
The annual gift tax exclusion for 2025 is $19,000 per recipient per year (up from $18,000 in 2024). The 2026 figure is announced annually by the IRS. This is the amount you can gift to any individual without using up your lifetime gift/estate exemption or filing a gift tax return.
Practical applications for business owners:
For business owners using gifting as a succession strategy, the annual exclusion is the cleanest way to start transferring ownership over time without triggering gift tax. Combined with valuation discounts for closely-held businesses, it can move significant value to the next generation tax-efficiently.
A living trust (specifically a revocable living trust) is a legal arrangement where you transfer ownership of assets to a trust during your lifetime, then continue to manage and benefit from those assets as the trustee. At death, the assets pass to named beneficiaries through the trust rather than through probate court.
The primary advantages are: avoiding probate (faster transfer to beneficiaries, lower cost, more privacy), continuity of asset management if you become incapacitated, and clearer succession for business interests. The trust does NOT reduce estate taxes — assets in a revocable trust are still in your estate for tax purposes.
Living trusts make sense when: you own real estate in multiple states (avoid multiple probate proceedings), you have business interests that need continuity at incapacitation, you want privacy around what you own and who inherits it, or you have a blended family or children from prior relationships. Living trusts are generally NOT needed for very simple estates of a single home + retirement accounts + life insurance, where beneficiary designations and joint tenancy handle most assets.
Income in Respect of a Decedent is income that was earned by a deceased person but not received before death. The most common examples: traditional IRA balances, pension distributions, accrued bond interest, deferred compensation, and final-paycheck items.
IRD does NOT get a step-up in basis at death (unlike most other inherited assets). The beneficiary who eventually receives the IRD pays ordinary income tax on it — exactly as the decedent would have. For high-income beneficiaries inheriting a large traditional IRA, this can mean 35-37% federal tax on top of state income tax.
Planning approaches for IRD-heavy estates:
For business owners with seven-figure traditional IRA balances, IRD planning over the 5-10 years before retirement makes a measurable difference in the after-tax wealth passed to the next generation.
When most assets are inherited, their cost basis “steps up” to the fair market value on the date of death. This wipes out unrealized capital gains accumulated during the decedent’s lifetime, so the heir’s eventual sale is taxed only on gains AFTER inheritance.
Example: a small business owner buys real estate for $200,000 in 1990. By their death in 2026, it is worth $1.5 million. The unrealized gain of $1.3M during their lifetime is wiped out — the heir inherits with a basis of $1.5M. If the heir sells immediately, there is no capital gains tax.
The step-up applies to most assets: real estate, stocks, business interests, collectibles, equipment. Important exceptions where step-up does NOT apply: traditional IRAs and 401(k)s (these are IRD), assets held in joint tenancy (only the deceased’s portion steps up), and assets in certain irrevocable trust structures.
The step-up is one of the most valuable tax provisions in the code, and it interacts with capital gains planning during life. Holding highly-appreciated stock or real estate until death (rather than selling) eliminates the embedded capital gains tax. This is why “do not sell appreciated assets without a tax reason” is a core estate planning principle for older high-net-worth households.
The federal estate tax kicks in at the federal exemption ($13.99M in 2025). Below that, no federal estate tax applies. But state-level estate or inheritance taxes apply in 17 states plus DC, often with much lower thresholds.
Key state distinctions:
For business owners in estate-tax states with estates approaching the state threshold, state-level planning often matters more than federal. Texas owners largely escape state-level estate concerns but should still plan around federal thresholds and gift-tax mechanics.
Five mistakes account for most estate planning failures we see in client reviews:
Estate planning is one of those areas where the cost of doing nothing dwarfs the cost of getting it done. For Texas small business owners, the basics — will or trust, current beneficiary designations, succession plan, gift exclusion usage — typically cost a few thousand dollars to set up and save the estate (and the family) from much larger losses later.
If your estate plan was set up before 2020 (or never set up), it almost certainly needs a refresh given the SECURE Act, SECURE 2.0, and the pending TCJA sunset. Let’s review your current setup and identify the highest-leverage updates before year-end.
Until next time.
The federal estate tax exemption for 2025 is $13.99 million per individual ($27.98 million per married couple with portability). The 2026 figure is indexed for inflation and announced annually by the IRS. The elevated exemption is scheduled to sunset at the end of 2025 under the 2017 TCJA, returning to roughly $6-7 million per individual unless Congress extends. Check irs.gov for the current-year amount.
The annual gift tax exclusion for 2025 is $19,000 per recipient per year (up from $18,000 in 2024). A couple can together gift $38,000 to each recipient without using their lifetime exemption or filing a gift tax return. Direct medical and tuition payments are unlimited and do not count against the exclusion.
Not always. A living trust adds value when you own property in multiple states, hold business interests needing continuity at incapacitation, want privacy around your estate, or have a blended family. For simple estates with one home, retirement accounts, and life insurance, beneficiary designations and joint tenancy may handle most assets without a trust. A living trust does NOT reduce estate taxes — assets in a revocable trust are still in your estate for tax purposes.
IRD is income earned by a deceased person but not received before death — most commonly traditional IRA balances, pension distributions, accrued bond interest, and deferred compensation. IRD does NOT get a step-up in basis. The beneficiary pays ordinary income tax on the IRD as it is received. For large traditional IRAs, this can result in 35-37% federal tax on the inheritance for high-income beneficiaries.
Most inherited assets receive a basis step-up to fair market value on the date of death, wiping out unrealized capital gains accumulated during the decedent’s lifetime. Heirs who sell immediately pay no capital gains tax. The step-up applies to real estate, stocks, business interests, and collectibles. Important exception: traditional IRAs and 401(k)s are IRD and do NOT step up — they remain taxable as ordinary income to the beneficiary.
Adam Traywick, CPA is the President and founding CPA of Adam Traywick, LLC, a Fort Worth small-business accounting firm. He has over 20 years of experience helping small business owners across home-services trades, hair salons, real estate, and insurance agencies optimize taxes, run cleaner books, and avoid the surprises that come from once-a-year accountants.
