Authored by: Brian Sak, CFP®, CLU®, ChFC®
When it's time to transition a business, the structure of the deal matters just as much as the successor. Whether passing it to family, selling to key employees, or exiting through a third-party sale, each strategy carries its own tax implications—some immediate, others long-term. This article outlines the most common succession techniques, the tax challenges that often catch owners off guard, and practical solutions to help preserve enterprise value and minimize unnecessary tax exposure.
1. Outright Sale to a Third Party
Tax Challenge: Significant capital gains tax, and for C corporations, potential double taxation (corporate level and shareholder level).
Solution:
- Installment Sales: Allow deferral of recognition and spread tax liability.
- Enhanced QSBS Exclusion: Post‑July 4, 2025 QSBS gains exclusion raised to a maximum of $15 million, with scaled exclusions based on holding period—50 percent at three years, 75 percent at four years, 100 percent at five years.
- ESOPs (Section 1042): Sale to an ESOP remains an effective deferral tool when structured properly, particularly if reinvested under IRS guidelines.
2. Gifting Business Interests to Family
Tax Challenge: Potential gift tax triggers, especially if exceeding the annual exclusion or lifetime exemption.
Solution:
- Valuation Discounts: Apply for lack of control or marketability to reduce gift value, potentially by 20–40 percent.
- Grantor Retained Annuity Trusts (GRATs): Freeze the high exemption basis and shift future appreciation outside the estate.
- Annual Exclusion Gifting: Use the $19,000 (2025) annual per-recipient limit effectively.
- Leverage Elevated Exemption: Gifts made before January 1, 2026, benefit from the $13.99 million exemption—and thereafter, the permanent $15 million level.
3. Sale to Family Members or Key Employees
Tax Challenge: Recognition of gain and limited buyer liquidity.
Solution:
- Installment Sale: Defer gain recognition; receiver pays over time.
- Business‑Owned Life Insurance: Provides liquidity for future buyouts or estate obligations.
- Intra‑Family Loans at AFR: Use low Applicable Federal Rates (AFR) to facilitate sale terms.
4. Establishing an ESOP
Tax Challenge: Administrative complexity and compliance burden; risk of underperformance.
Solution:
- Section 1042 Deferral: Sellers may defer capital gains when selling to an ESOP if certain requirements are met.
- S Corporation ESOP: Can yield ongoing tax advantages, as ESOP-held portions are not subject to federal income tax.
5. Using Trusts for Multigenerational Transfers
Tax Challenge: Estate, GST, and control concerns across generations.
Solution:
- Intentionally Defective Grantor Trusts (IDGTs): Remove future appreciation from estate while preserving flexibility and tax benefits.
- GST Exemption Allocation: With the exemption now fixed at $15 million (individual), properly allocating GST exemption ensures multigenerational transfers remain tax-efficient.
- Dynasty Trusts: Where state law permits, provide lasting control and tax benefits.
Compression of Opportunity: Why Timing Matters
OBBBA removed the uncertainty of sunset, but timing still matters:
- The $13.99 million exemption applies through 2025; beginning January 1, 2026, the new permanent threshold is $15 million.
- Owners should evaluate gifting and estate strategies now to take full advantage of either exemption level.
Conclusion: Strategy Aligned With Certainty
Each succession method carries tax implications—but informed planning turns those into opportunity. With OBBBA’s permanent $15 million exemption and stable annual exclusion in place, business owners now have a foundation of certainty.
At Granite Harbor Advisors, we believe successful succession is built not just on tactics, but on coordinated strategy—combining tax, legal, and financial insight to preserve value, ensure liquidity, and secure a seamless transition.
When you're ready to translate strategy into practice, our team is here to guide each step with clarity and confidence.
Tax numbers are accurate as of the date of this publication but are subject to change. Please consult with a tax professional prior to implementing any strategies referenced above.