Estate Planning for Business Owners After the One Big Beautiful Bill Act
Updated: 4 hours ago
By Trenton Roberts and Jay Stigers
Circular 230 / general information notice. This article is general information only. It is not tax, legal, or accounting advice. Reading it does not create an attorney-client relationship. Tax results depend on your facts and on law that can change. Consult your own attorney and CPA before taking any action. This article was not written to be used, and cannot be used, to avoid tax penalties.
For years, estate planning for business owners ran on a countdown clock, because the higher exemption from the 2017 tax act was scheduled to fall by roughly half after 2025. The One Big Beautiful Bill Act (Pub. L. 119-21, signed July 4, 2025) stopped the clock. Section 70106 of the Act amended Section 2010(c)(3) of the Internal Revenue Code so that the basic exclusion amount is $15,000,000 for estates of decedents dying and gifts made after December 31, 2025, indexed for inflation after 2026. A married couple can shelter $30 million in 2026 before the federal estate or gift tax applies. The annual exclusion stays at $19,000 per recipient for 2026, according to the IRS.
"Permanent" means there is no sunset in the statute, not that Congress cannot change it. Still, the question has shifted from how fast an owner can move assets out of the estate to whether moving them is worth giving up a basis step-up, and how to keep a growing company from outrunning the exemption. For most owners, the hardest estate conversations are rarely about tax rates, because the tax answer is usually a calculation and the family answer is not. They are about the child who works in the business and the ones who do not, and about how to treat them fairly without handing the company to a committee.
What the permanent exemption changed, and what it did not
The maximum federal estate and gift tax rate is still 40 percent, and the generation-skipping transfer (GST) exemption tracks the basic exclusion, so it is also $15 million in 2026. Portability survives: the first spouse's unused exclusion (the "DSUE amount") can pass to the survivor if the executor files a timely, complete Form 706 electing it, and Rev. Proc. 2022-32 allows a simplified late election within five years of death for estates not otherwise required to file. But the DSUE amount is not indexed after the first death, and GST exemption is not portable at all.
What the Act did not change is the math of growth. A company worth $12 million today that compounds at 8 percent a year roughly doubles in about nine years. An owner couple with $32 million of combined assets in 2026 has about $2 million above a $30 million shelter, which at 40 percent is about $800,000 of federal estate tax if both died this year. If the business keeps growing faster than inflation indexing moves the exemption, the exposure grows every year. That is why the freeze techniques below still matter, even for families who no longer fear a sunset.
Freeze technique one: the grantor retained annuity trust
A grantor retained annuity trust (GRAT) is authorized by Section 2702. The owner transfers assets to an irrevocable trust and keeps a fixed annuity for a term of years. Whatever is left at the end of the term passes to the remainder beneficiaries, usually children or a trust for them. The taxable gift is the value of the assets minus the present value of the retained annuity, computed using the Section 7520 rate in effect for the month of the transfer. The Section 7520 rate is 120 percent of the applicable federal midterm rate, rounded to the nearest two-tenths of a percent.
In Walton v. Commissioner, 115 T.C. 589 (2000), the Tax Court accepted an annuity designed so that the retained interest equals essentially the full value contributed. That "zeroed-out" GRAT produces a gift of nearly zero. The bet is simple: if the assets outperform the Section 7520 rate, the excess passes to the family free of gift tax. If they do not, the assets come back to the owner through the annuity and little is lost except costs.
A worked example. An owner contributes $5,000,000 of nonvoting LLC units to a two-year GRAT when the assumed Section 7520 rate is 5 percent. A zeroed-out annuity is about $2,689,024 a year. If the units return 15 percent a year, the trust is worth $5,750,000 at the end of year one, pays the annuity, and holds about $3,060,976. At the end of year two it grows to about $3,520,122, pays the second annuity, and about $831,098 passes to the children with no gift tax and no use of exemption. If the units had returned exactly 5 percent, nothing would pass, and the owner would simply have the units back.
GRATs fit closely held companies for a few reasons. The annuity can be stated as a percentage of the initial fair market value of the trust property (Treas. Reg. 25.2702-3(b)(1)(ii)), so if the IRS later raises the value of the units, the annuity adjusts and the gift stays small. The annuity can be paid in kind with units. And short, rolling GRATs capture a strong year without betting a decade on one trust.
The risks are just as specific. If the owner dies during the term, some or all of the trust is pulled back into the estate under Section 2036 and the related regulations. A GRAT is also a poor vehicle for GST planning, because Section 2642(f) does not allow GST exemption to be allocated until the end of the "estate tax inclusion period," which is after the growth has already happened. Finally, a closely held interest needs a qualified appraisal at funding and at each in-kind payment.
Freeze technique two: a sale to an intentionally defective grantor trust
An intentionally defective grantor trust (IDGT) is an irrevocable trust drafted to be outside the owner's estate for estate tax purposes while remaining a grantor trust for income tax purposes under Sections 671 through 679. A common trigger is a power held in a nonfiduciary capacity to reacquire trust assets by substituting property of equal value under Section 675(4)(C). Rev. Rul. 2008-22 concluded that this substitution power, held properly, does not by itself cause estate inclusion.
The structure: the owner makes a seed gift of cash or units to the trust, then sells additional units to the trust for a promissory note bearing interest at no less than the applicable federal rate. Because the trust is a grantor trust, Rev. Rul. 85-13 treats the sale as a transaction between the owner and himself for income tax purposes. There is no gain on the sale and no income tax on the interest. Many planners prefer a seed of roughly 10 percent of the purchase price so the trust has real equity behind the note. That is a practice convention rather than a statutory rule, and it is worth discussing with your advisers rather than assuming.
Here is how the numbers can work. The owner gives $1,000,000 in cash to the trust, then sells it nonvoting units appraised at $10,000,000 for a nine-year interest-only note at an assumed 4.5 percent, with a balloon at maturity. If the units produce an 8 percent total return and the trust pays $450,000 of interest each year, the trust holds roughly $16.37 million after nine years. It repays the $10 million principal and keeps about $6.37 million outside the estate. Excluding the $1 million seed, about $5.37 million of growth never entered the taxable estate. For an estate above the exemption, that is roughly $2.15 million of federal estate tax avoided at 40 percent.
The owner also pays the income tax on the trust's earnings, which shrinks the estate without a taxable gift. Rev. Rul. 2004-64 concludes that a discretionary power in an independent trustee to reimburse the grantor for that tax does not, by itself, cause estate inclusion where state law does not let the grantor's creditors reach the trust. And unlike a GRAT, GST exemption can be allocated to the seed gift up front.
Red flags: a note the trust cannot realistically service, payments that track trust income so closely they look like a retained income interest, and unpriced beneficiary guarantees. Treat the note like real debt and pay it on time.
Valuation discounts are still available, but the facts carry them
Gifts and sales of minority, nonvoting interests in a family company are generally valued with discounts for lack of control and lack of marketability. Rev. Rul. 93-12 accepts that family ownership is not automatically attributed to a donee when valuing a minority interest. Treasury proposed regulations under Section 2704 in 2016 that would have limited many of these discounts, and it withdrew them in 2017. Discounts are therefore governed by appraisal practice and the case law, not by a fixed percentage.
Discounts usually fail because of how the entity was run, not the appraiser's math. In Estate of Powell v. Commissioner, 148 T.C. 392 (2017), the Tax Court included partnership assets in the decedent's estate under Section 2036(a)(2) because the decedent, acting with the other partners, could dissolve the partnership. Deathbed transfers, personal-use assets parked in the entity, commingled bank accounts, and distributions made on request are the facts we look for first.
What helps: a real business purpose, separate books, capital accounts kept under the operating agreement, a qualified appraisal at each transfer, and a gift tax return that meets the adequate disclosure rules in Treas. Reg. 301.6501(c)-1(f), which starts the three-year limitations period on the gift.
Buy-sell agreements and life insurance after Connelly
On June 6, 2024, the Supreme Court decided Connelly v. United States. Two brothers owned a building supply corporation. The company owned life insurance on each brother so it could redeem a deceased brother's shares. When Michael Connelly died, the company received about $3.5 million of insurance and used $3 million to redeem his 77.18 percent stake. His estate argued that the redemption obligation offset the insurance proceeds. The Court unanimously disagreed. It held that a corporation's contractual obligation to redeem shares at fair market value is not a liability that reduces the company's value for estate tax purposes. The insurance proceeds increased the company's value to about $6.86 million, and Michael's shares were valued at about $5.3 million. That valuation produced additional estate tax.
A company-owned policy funding a redemption can increase the very estate tax it was meant to help pay. The Court noted that a cross-purchase arrangement would have avoided the problem.
Ways we see owners respond:
Cross-purchase agreements. Each owner insures the others. Clean for two or three owners, unwieldy beyond that.
An insurance LLC or partnership. A separate entity owned by the owners holds one policy per owner. The transfer-for-value rule in Section 101(a)(2) has exceptions for transfers to a partner of the insured or to a partnership in which the insured is a partner, which is why this design gets attention.
Keeping the redemption, eyes open. With a $15 million exemption per person, many estates can absorb the Connelly result, as long as the price formula states expressly whether insurance proceeds count.
Price formula clean-up. A buy-sell price is respected for estate tax purposes only if it meets Section 2703(b): a bona fide business arrangement, not a device to transfer value to family for less than full consideration, and terms comparable to arm's-length arrangements. A stale fixed price that nobody has updated in years is a common failure.
Do not move existing policies without a tax review. A change in ownership can trigger the transfer-for-value rule and make death benefits partly taxable.
Basis step-up versus gifting: the tradeoff most families now face
Property included in a decedent's estate generally receives a basis equal to fair market value at death under Section 1014. Property received by gift generally keeps the donor's basis under Section 1015. Rev. Rul. 2023-2 confirms that assets in an irrevocable grantor trust that are not included in the grantor's gross estate do not receive a step-up at death just because the trust was a grantor trust.
Consider an owner whose company units have a $1 million basis and a $9 million value. If he gives the units to his children and they later sell for $9 million, they recognize $8 million of gain. At a 20 percent long-term capital gain rate plus the 3.8 percent net investment income tax where it applies, that is about $1,904,000 of federal income tax. If he holds the units until death and his estate is under the exemption, the children take a $9 million basis and can sell with little or no gain. In that case the gift cost the family about $1.9 million and saved nothing.
The gift wins only when the estate tax saved on post-gift growth (40 percent of the growth, for an estate above the exemption) is larger than the income tax cost of losing the step-up. For a couple well under $30 million who expect modest growth, holding appreciated assets until death is often the better answer. For a couple already above the line, or with a company growing fast, freezing future growth through a GRAT or IDGT sale still makes sense, and the Section 675(4)(C) swap power lets the owner later buy back low-basis units with cash or high-basis assets so the low-basis units come back into the estate for a step-up.
One trap: under Section 1014(e), appreciated property given to someone who dies within one year and returns to the donor or the donor's spouse gets no step-up.
Estate planning for business owners: a working sequence for 2026
Build a balance sheet with values, basis, and projected growth for the business and every other major asset.
Compare the projected estate against the indexed exemption, including portability.
If it stays under the shelter, focus on step-up, liquidity, governance, and fairness among children.
If it does not, model a GRAT, an IDGT sale, or both, with real appraisal assumptions and current rates.
Read the buy-sell agreement and the insurance ownership together, and fix Connelly exposure and the price formula at once.
Split voting and nonvoting units before any transfer so the child who runs the company keeps control.
How we can help
We work on the entity, transfer, and buy-sell documents with your CPA and financial advisers, so the corporate paper and the tax plan say the same thing.
If you want to talk through your own numbers, email info@robertsandwillie.com or call (469) 910-4017. Sending a message does not create an attorney-client relationship.
Disclaimer. This article is for general information only and is not tax, legal, or accounting advice. It does not create an attorney-client relationship. Tax law changes and depends on your specific facts. Do not act on this article without consulting your own attorney and CPA. This article is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or other applicable law. Attorney Advertising. Roberts & Willie, PLLC, Dallas, Texas; Trenton Roberts, responsible attorney.
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