🔒With Trump tax cuts set to expire, tax pros tell businesses not to wait to develop a succession plan

There are many reasons for a business owner to develop a succession plan.

It can ensure continuity and minimize disruptions, especially in the face of an unexpected death. It also can help prepare employees for future leadership roles.

But attorney Sahri Zeger, a principal and leader of the trusts and estates group with accounting and advisory firm CohnReznick, which has offices in Hartford and Stamford, tells her clients to think of it in a very personal way.

“I tell people a basic estate plan is effectively a ‘love letter’ to your family, because you’re sparing them a lot of trouble,” Zeger says.

“It’s more sophisticated in terms of tax planning, succession, charitable, philanthropy, that kind of stuff,” she continued. “But the basic estate plan, if you don’t want to do anything else, at least do that for the people you love.”

A succession plan may be even more critical in 2025, though, given the uncertainty surrounding potential changes at the federal and state levels that could drastically alter estate tax exemption thresholds.

Trump tax cuts

At the federal level, business planners and tax professionals are keeping a close eye on whether tax cuts approved during the first Trump administration will be extended before they expire at the end of the year.

The Tax Cut and Jobs Act (TCJA) was approved by Congress in 2017, and signed into law by President Donald Trump in January 2018, during his first term.

“It was the biggest change to the tax code since the ’70s,” said James Zahansky, principal, managing partner and chief strategist for WHZ Strategic Wealth Advisors, which has offices in Pomfret and Tolland.

The TCJA nearly doubled the federal lifetime estate and gift tax exemption. For 2025, the exemption is $13.99 million per person and $27.98 million for a married couple. Any assets above the exemption are taxed at the federal rate of 40%.

Back in 2000, Zeger said, the lifetime estate and gift tax exemption for a single person was $675,000.

“It really had not increased for decades,” she said. “The (George W.) Bush administration came in and started slowly stepping it up. We had another tax law change that increased the exemption to $5 million per person, and that was indexed for inflation.”

Then came the TCJA, which not only doubled the exemption, but continues to increase it annually based on inflation, Zeger said.

“In 2025 we now have just under $14 million per person in lifetime exemption,” she said. “So, you can give away almost $14 million before you incur a single dollar of federal estate tax. That increased exemption is scheduled to sunset at the end of 2025 unless it’s extended.”

Vincent A. Liberti Jr., a partner with the Connecticut-based law firm Halloran Sage LLP, said that if the TCJA is not extended, the “exemption is expected to be around $7 million per person.”

When a business owner dies, Liberti said, the exemption is applied to the gross taxable estate — “with adjustments for taxable gifts during his or her life.”

Zahansky said the tax is based on the valuations of privately held companies, whether small, medium or large.

“The transfer of that wealth to the next generation is usually the largest part of anyone’s estate,” he said. “So, if they’ve set up a succession that is family-based, there’s only so much you can pass along based on federal and state limits.”

State taxes

In addition to the federal tax, Connecticut has an estate tax as well, set at a flat 12% rate.

According to the Tax Foundation, Connecticut is one of just 12 states with an estate tax, and the only one that has linked its exemption threshold to the federal threshold.

“If the federal exemption rolls back, the Connecticut exemption will roll back too,” Zeger said.

Among states with an estate tax, Connecticut’s exemption threshold is the highest, but its tax rate is not. Vermont, for example, has a $5 million exemption threshold but a flat 16% rate. New York has a $6.94 million exemption threshold, but its tax rate is graduated, starting at 3.06% and rising to 16%.

Six states have an “inheritance tax,” an alternate tax imposed on bequests — gifts made as part of a will or trust. New Jersey and Kentucky have the highest top marginal rates at 16%, according to the Tax Foundation.

There are two bills proposed in the state General Assembly for the 2025 session that, if approved, would significantly alter Connecticut’s estate tax.

House Bill 6461 would eliminate the estate and gift tax, while H.B. 5152 would lower the exemption threshold to $3.6 million and eliminate the caps on estate and gift taxes. The latter bill would use tax revenue raised by the lower estate tax threshold to support early childhood education.

Both bills were referred to the legislature’s Finance, Revenue and Bonding Committee, where no action has been taken on them.

That is not a surprise to Liberti. “Almost every year, there are tax proposals like these bills,” he said. “Few pass. It is an arduous path to enact estate tax changes, with many interest groups weighing in. I have learned to employ a wait-and-see doctrine.”

Act now

Opinions vary among tax professionals as to whether the TCJA will be extended, or even made permanent, by the end of the year.

Liberti says “it seems likely” they will be extended, since Republicans control both chambers of Congress. Zahansky agrees. Zeger, however, isn’t so sure they will be made permanent.

All agree, however, that waiting to find out is bad succession planning.

“The fact is that, especially with tax law, we don’t ever consider it permanent,” Zeger said.

Especially for a business being transferred to a family member, without careful planning, “the family may be forced to finance the business assets or sell the business to pay the estate tax, which is due nine months after one’s death,” Liberti said.

Zahansky said the estate tax doesn’t affect most Americans, but it’s vital for business succession planning that business owners prepare well in advance.

“If you’re a medium-sized business and you haven’t had a valuation of your business done, you need to know what it’s valued at and how it fits into your estate, because a lot don’t,” he said. “If you’re going to go down the path of a succession plan, know the legitimate market value of your business. Have it done by a third party and understand the market value.”

He added that another reason to have a succession plan in place is so you “don’t leave that burden on your heirs. That can be very disruptive for those that might be inheriting a business they didn’t know anything about.”