What Entrepreneurs Should Know About Tax Planning During the Succession of Their Business

Proper tax planning can make the biggest difference when transitioning or selling a business. If you’re a business owner, this is a must-read. If you know someone who owns a business, this is a must-share.

That’s because for entrepreneurs and executives, building a successful business is often a lifelong endeavor. However, making sure the fruits of your labor are preserved and transferred effectively to the next generation, or a chosen successor, requires careful planning. One of the most critical, yet often overlooked, components of this process is tax planning. Business succession is not just about handing over the reins—it’s about doing so in a way that minimizes tax liabilities, maximizes value, and ensures long-term stability for both the business and the individuals involved.

Why Tax Planning Matters in Business Succession

Business succession involves transferring ownership and control of your company, whether to family members, key employees, or an external buyer. Without strategic tax planning, this transition can trigger significant tax consequences that erode the business’s value and your wealth. Federal and state taxes—such as estate taxes, gift taxes, and capital gains taxes—can take a substantial bite out of the proceeds if not addressed proactively.

For instance, in the United States, the federal estate tax can reach rates as high as 40% on estates exceeding the exemption threshold (set at $13.99 million per individual in 2025). For high-net-worth entrepreneurs, this could mean millions of dollars lost to taxes instead of being passed on to heirs or reinvested in the business. Effective tax planning helps mitigate these burdens with the goal of keeping the business’s value where it belongs—with the owner’s intended beneficiaries.

Key Tax Considerations in Succession Planning

1. Valuation of the Business

A critical first step in tax planning is determining the fair market value of your business. This valuation not only affects the sale price or transfer value, but it also dictates the tax implications. Undervaluing or overvaluing your business can lead to IRS scrutiny or missed tax-saving opportunities. Working with a financial advisor, qualified appraiser, and tax advisor can help you formulate an accurate valuation that aligns with IRS guidelines and optimizes tax outcomes.

2. Gift and Estate Tax Strategies

Entrepreneurs often want to pass their business to family members. Gifting shares during their lifetime can reduce the taxable estate, taking advantage of the annual gift tax exclusion ($19,000 per recipient in 2025) and the lifetime gift tax exemption. Trusts, such as grantor retained annuity trusts (GRATs) or irrevocable life insurance trusts (ILITs), can also be powerful tools to transfer wealth while minimizing estate and gift taxes.

3. Capital Gains Tax Management

Selling a business outright or transferring appreciated assets can trigger capital gains taxes. Structuring the sale as an installment sale, where payments are spread over time, can defer and potentially reduce these taxes. Alternatively, leveraging Section 1031 exchanges (for real estate-heavy businesses) or selling to an Employee Stock Ownership Plan (ESOP) can offer tax deferral benefits.

4. Buy-Sell Agreements and Funding

For businesses with multiple owners, a buy-sell agreement funded with life insurance can facilitate a smooth transition while providing tax advantages. The proceeds from the insurance policy are typically tax-free, allowing surviving owners or heirs to buy out the deceased owner’s share without dipping into business cash flow.

Timing Is Everything

Tax planning for business succession isn’t a last-minute task—it’s a long-term strategy. The earlier you start, the more options you have to minimize taxes. For example, transferring ownership gradually over years can leverage annual gift tax exclusions and lower the overall taxable value of the estate. By waiting until retirement or a sudden health crisis, it can limit your flexibility and could force a rushed, tax-inefficient transition.

Partnering with Experts

The complexities of tax law requires expertise. Entrepreneurs and executives should assemble a team of professionals, including a tax advisor, estate planning attorney, accountant, and financial advisor to design a succession plan tailored to their business and personal goals. These experts can identify opportunities like charitable trusts, family limited partnerships, or other tax-advantaged structures that align with the owner’s vision.

Proper tax planning can be the backbone of a successful business succession strategy. It protects the legacy of entrepreneurs and executives by preserving wealth, reducing tax liabilities, and promoting a seamless transition. By addressing valuation, leveraging tax exemptions, and timing the transfer strategically, business owners can work to secure their company’s future and their family’s financial well-being. Don’t leave your life’s work to chance—start planning today to make succession as rewarding as the journey that built your business.

Contact us today to hear how we integrate, coordinate, and facilitate your entire advisor team with the goal to achieve peace-of-mind.

Disclaimer: This blog is for informational purposes only and does not constitute tax, legal, or financial advice. Please consult with a qualified professional to address your specific circumstances.