Estate taxes and your business

Estate Tax
istock.com/alexskopje

Two years ago, when the Kansas City Chiefs won Super Bowl LIV, celebration ensued around Chiefs Kingdom. A season of excitement, challenges, and epic comebacks culminated with the ultimate prize.

What if your LBM business mirrored Kansas City’s story, however, there wasn’t a celebratory parade at the end?

The federal estate tax can be a parade stealer. As an LBM business owner, you can run your company and invariably experience highs, lows, challenges, and struggles and still come out on top—or think you have.

- Sponsor -

The federal estate tax was enacted in 1916, as a way to redistribute wealth in our country. There was a real concern that too few controlled too much of our country’s wealth (sound familiar?) and via the federal estate tax, that wealth would be redistributed (taxed) upon the death of an individual.

What was once designed to zero in on the extreme elite, eventually became a tax on the “non-extreme elite.” Although statistically, a very small percentage of U.S. citizens actually pay the estate tax, more landowners and business owners would be impacted by the estate tax, as their assets exceeded exemption amounts.

Today, in July 2021, those exemption amounts are the highest in our country’s history. Under current law, however, those high levels (11.7m/person and 23.4m/married couple) will essentially be slashed in half on Jan. 1, 2026. This will increase taxes for some business owners and introduce a tax to others, who currently would not be taxed. For those over the exemption amount, the tax rate is 40%.

There is momentum building on expediting the reduction scheduled for Jan. 1, 2026, combined with a much lower exemption and higher tax rate.

The estate tax has always been fluid. Exemption levels have ebbed and flowed. For example, from 1987-1997, the exemption was $600,000 with a top rate of 55%. In 2010, there was a one-year complete repeal (the federal estate tax has been repealed several times, and has always reappeared), and between 2011 and 2021, the exemption amount has gone up, while maintaining the 40% tax rate.

This alone can be confusing and it’s just one of the many reasons why we always insist our LBM clients and the LBM business owner audiences we present to be proactive with their planning.

Like the fluidity of the history of the federal estate tax, owning a business in the LBM space can be similar. Some days may run smoothly, and others may include an unexpected list anywhere from one to 17 items that need to be addressed. You never can tell.

So many LBM business owners achieve personal financial success while also employing dozens, hundreds, or more. The LBM business owner makes a real difference in their communities and well beyond. All should be championed, but those that will be impacted by the federal estate tax may not have the championship parade at the end of the day.

If you’re an LBM business owner and not fully aware of what’s going on in the world of federal estate taxes, all the good that you’ve brought to your family, employees, and community may come to a screeching halt. A thriving LBM business one day could become the LBM business that is now up for sale at fire sale prices, resembling nothing of the true fair market value.

As part of the federal estate tax law, the estate tax is due within nine months after date of death of the business owner (or any U.S. citizen that owns assets that exceed the exemption amount). If married, the tax may be deferred until the second spouse passes away. Also, any assets left directly to a qualified charity will escape taxation.

If you own a business that you want to pass down to the next generation or other successors, you must be cognizant of the federal estate tax and the impending significant change.

If you sell your business during your lifetime, in addition to capital gains and other potential taxes, you must be cognizant of the federal estate tax and the impending significant change.

It’s also critically important for LBM business owners to have the correct buy/sell agreements (if the business is owned by more than one party), estate planning documents and life insurance to coordinate with your business succession and estate planning goals. Simply wanting something to happen is insufficient. Intentions are great, but the tax man is stronger.

 

Leon B. Resnick is a partner in Resnick Associates, a nationally recognized business succession, estate planning and life insurance advisory and implementation firm with offices in Kansas City and Philadelphia. Lee works with many LBM-related co-ops and their individual business owner members across the U.S. Contact Lee at lee@resnickassoc.com or 913.681.5454.

Stay Updated

Get our email newsletter with LBM industry trends, data, new products, and best practices.