Estate Tax Planning for Business Owners: 2026 Strategies

Business owners should approach estate and gift tax planning by combining their permanent $15 million federal exemption (per person, indexed for inflation) with transfer techniques that reduce the taxable value of a closely held business interest before that interest grows further. The right mix of annual gifting, trust structures, and business-entity planning can shift substantial wealth to heirs with little or no transfer tax, but the strategies require coordination between legal, tax, and valuation advisors well before any ownership transition.

What Changed Under OBBBA: The $15 Million Exemption Is Now Permanent

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, eliminated the December 31, 2025, sunset that would have roughly halved the federal estate and gift tax exemption. For 2026, the unified lifetime exemption is $15,000,000 per individual, up from $13,990,000 in 2025. Married couples can shelter $30,000,000 combined through portability. The exemption is now permanent and indexed for inflation beginning in 2027, using 2025 as the base year.

The top federal estate and gift tax rate remains 40% on the taxable amount above the exemption. The IRS confirmed the 2026 threshold in its annual inflation adjustment release. The annual gift tax exclusion remains $19,000 per recipient ($38,000 if gifts are split between spouses), meaning owners can transfer that amount to any number of individuals each year without touching their lifetime exemption or filing a gift tax return.

What Portability Means in Practice

Portability lets a surviving spouse “inherit” the deceased spouse’s unused exemption. To claim it, the executor files IRS Form 706 within nine months of death (up to 15 months with the automatic six-month extension), even if no estate tax is owed. If the estate is not otherwise required to file a 706, Revenue Procedure 2022-32 provides simplified relief that generally allows a late portability election up to the fifth anniversary of death. For couples whose combined estate is under $30 million, a timely and properly filed 706 can eliminate estate tax exposure entirely.

Generation-Skipping Transfer Tax

The generation-skipping transfer (GST) tax exemption equals the basic exclusion amount, so it is also $15,000,000 per person in 2026, indexed going forward. GST applies when transfers skip a generation, for example directly to grandchildren or into a dynasty trust. Business owners with multigenerational wealth goals should allocate GST exemption carefully; improperly structured trusts can trigger a 40% flat GST tax in addition to any gift or estate tax.

Why Business Owners Face Distinct Estate Tax Challenges

The estate tax creates a liquidity problem for closely held businesses. A business owner may build substantial paper wealth, but the estate rarely holds equivalent cash to pay a 40% tax bill. Three factors compound the risk.

Business value grows faster than exemption indexing. A regional services company worth $8 million today may be worth $18 million in a decade. At that point, taxable value above the $15 million (or inflation-adjusted) threshold is exposed to a 40% hit. The time to plan is well before value peaks.

Illiquidity forces a bad sale. Without planning, heirs may have to sell all or part of the business to satisfy estate tax obligations on a timeline set by the IRS, not the market. That typically means a below-market transaction price.

Step-up in basis is not a replacement for planning. Inherited assets receive a basis reset to fair market value at death, wiping out embedded capital gains. That is valuable, but it does not reduce the estate tax owed, and it disappears if assets are transferred during life through certain structures.

Core Estate Tax Planning Strategies for Business Owners

Maximize Annual and Lifetime Gifting Now

The $19,000 annual exclusion is simple and underused. An owner with three adult children and their three spouses can transfer $114,000 per year ($19,000 x 6 recipients) with no gift tax return and no impact on the lifetime exemption. Gifts of appreciating minority business interests shift future growth out of the estate, which is the key compounding advantage.

Because the $15 million lifetime exemption is now permanent, the urgency to “use it or lose it” before a sunset deadline is gone. That said, every dollar of appreciation that accrues inside the estate is potentially taxed at 40% at death, so early transfers of high-growth business interests remain strategically valuable.

For a deeper look at integrated tax strategy, see Modus’s tax services for business owners.

Family Limited Partnerships and LLCs

Transferring a business interest or investment portfolio into a family limited partnership (FLP) or multi-member LLC and then gifting limited partnership or membership interests allows minority interest discounts. A minority interest in a private company is worth less than its proportional share of the whole because it carries no control rights (minority discount) and cannot be easily sold (lack-of-marketability discount). Combined, these discounts often run 20 to 35%, depending on independent appraisal.

In practice: an owner funds an FLP with $5,000,000 of business assets. An independent appraiser values a 40% limited partnership interest at $1,700,000 rather than $2,000,000, reflecting a 15% discount. Gifting that interest uses $1,700,000 of lifetime exemption to remove $2,000,000 of value. The IRS scrutinizes FLPs closely, looking for entities with no genuine business purpose beyond tax minimization, so the structure must reflect real operations, capital accounts, and governance.

Grantor Retained Annuity Trusts

A grantor retained annuity trust (GRAT) transfers an appreciating asset to a trust in exchange for an annuity stream paid back to the grantor over a fixed term (commonly 2 to 10 years). At the end of the term, whatever remains in the trust above the annuity payments passes to beneficiaries with little or no gift tax cost. The strategy is most effective when the transferred assets grow faster than the IRS hurdle rate (the 7520 rate, published monthly).

For a closely held business interest, a GRAT works especially well when the owner expects a near-term value event, such as an acquisition, a new revenue contract, or a capital raise. The appreciated upside transfers to heirs; if the grantor dies during the GRAT term, the assets generally return to the estate, so GRATs are typically structured with short terms or as rolling two-year GRATs.

Intentionally Defective Grantor Trusts

An intentionally defective grantor trust (IDGT) is an irrevocable trust that is excluded from the grantor’s taxable estate for estate tax purposes, but treated as a “grantor trust” for income tax purposes. That disconnect creates two advantages: (1) the grantor pays income tax on trust earnings, which is effectively an additional tax-free gift to beneficiaries, and (2) the sale of appreciating assets to the trust in exchange for a promissory note at the applicable federal rate (AFR) does not trigger capital gains, because seller and buyer are the same person for income tax purposes.

A business owner can sell a $10 million business interest to an IDGT for a $10 million note at the AFR. If the business grows to $18 million, the $8 million of appreciation has passed to heirs without gift tax. The owner retains an income stream from the note. This structure requires a 10% “seed gift” into the trust (using $1 million of exemption in this example) to establish economic substance. IDGTs work best for illiquid, high-growth assets where independent valuation supports the sale price.

Installment Payments Under IRC Section 6166

When a closely held business represents more than 35% of an estate’s adjusted gross value, the executor may elect to defer estate tax under IRC Section 6166. The election allows the estate to pay interest only for up to five years, then pay the tax in up to 10 equal annual installments, extending the payment window to nearly 15 years from the date of death. A reduced 2% interest rate applies to the estate tax attributable to the first $1,940,000 of taxable business value for 2026 (this figure is indexed for inflation under Revenue Procedure 2025-32); the remainder accrues at 45% of the underpayment rate.

IRC 6166 does not eliminate the tax obligation, but it gives heirs time to generate income from the business to fund payments without a forced sale. Qualification criteria are strict and require careful planning. A failing business or one that changes hands before payments are complete may lose the election.

Business Succession Coordination

Estate tax planning and business succession planning are not separate exercises. Key integration points include the following.

Buy-sell agreements. A properly drafted buy-sell agreement (cross-purchase or redemption structure) establishes price and terms for ownership transfers at death, disability, or retirement. The agreement should be regularly reviewed and updated with independent appraisals to ensure IRS compliance and avoid disputes over value. An outdated buy-sell funded with life insurance purchased years ago may undervalue the business substantially, creating estate and income tax complications.

Life insurance trusts. An irrevocable life insurance trust (ILIT) holds a life insurance policy outside the taxable estate. Proceeds can fund a business buyout or estate tax obligation without being included in the gross estate. Annual premium payments are covered by the $19,000 annual exclusion using Crummey notices to establish present-interest gifts.

Pre-sale planning. If a business sale is being contemplated, estate planning should occur well in advance of signing a letter of intent. After a deal is signed, it is difficult or impossible to discount the value of the business interest for transfer tax purposes, because the price is effectively fixed. Our transaction advisory team regularly works with owners ahead of M&A processes to layer estate planning into the deal structure.

For broader planning questions, including buy-sell structure and succession readiness, Modus’s advisory services support mid-market owners through these decisions.

State Estate Taxes Are a Separate Concern

The federal exemption at $15 million does not apply to state estate taxes. Twelve states and the District of Columbia impose a separate estate tax, often with exemptions as low as $1 million to $2 million. Owners with real property, payroll, or significant operations in multiple states should map their exposure across jurisdictions. A business owner based in a no-tax state who holds commercial real estate in a high-tax state may still owe state estate tax on that property.

Related reading: Business Succession Planning: A 5-Year Roadmap

Frequently Asked Questions

What is the federal estate tax exemption in 2026?

The federal estate and gift tax exemption is $15,000,000 per individual for 2026, as established by the One Big Beautiful Bill Act (OBBBA) signed in July 2025. Married couples can shelter up to $30,000,000 combined using portability. The exemption is now permanent and indexed for inflation each year beginning in 2027.

Does the $15 million exemption apply to the gift tax and estate tax together?

Yes. The federal exemption is “unified,” meaning lifetime taxable gifts and the taxable estate at death share the same $15 million pool. Every dollar of lifetime exemption used reduces the amount available to shelter assets at death. The annual gift tax exclusion of $19,000 per recipient does not count against the lifetime exemption.

What is the annual gift tax exclusion for 2026?

The annual exclusion is $19,000 per recipient in 2026, unchanged from 2025. A business owner can give $19,000 to each child, grandchild, or other recipient each calendar year without using any lifetime exemption or filing a gift tax return. Married couples who split gifts can double this to $38,000 per recipient per year.

How does a family limited partnership reduce estate taxes?

A family limited partnership (or LLC) holds business or investment assets. The owner then gifts or sells limited partnership interests to family members. Because those interests carry no management control and are illiquid, an independent appraiser applies minority and lack-of-marketability discounts, typically 20 to 35%. This allows more economic value to transfer for every dollar of lifetime exemption used. The IRS scrutinizes FLPs for legitimate business purpose, so proper formation, management, and documentation are essential.

What is IRC Section 6166 and when does it help?

IRC Section 6166 allows an estate to defer estate tax payments when a closely held business makes up more than 35% of the adjusted gross estate. The election allows interest-only payments for up to five years, followed by up to 10 annual installments of principal, stretching the payment window close to 15 years. It prevents heirs from being forced to sell a viable business at a distressed price just to meet a nine-month estate tax deadline.

When should a business owner start estate tax planning?

The best time to begin estate tax planning is well before a liquidity event, peak business value, or decline in the owner’s health. Trust structures and FLPs require legal formation time and independent appraisals. Strategies like GRATs work best when asset values are still rising. If a business sale is approaching, estate planning should be complete before a letter of intent is signed, because the transaction price effectively sets the asset’s value for tax purposes.