Insights | Restaurant, Franchise & Hospitality

Act Now, Save Later with Estate & Gift Tax Exemption

March 5, 2024

At a glance:

The main takeaway: Several significant tax laws are set to expire by the end of 2025. Congress may or may not decide to extend some or all of them, and franchise owners and individual taxpayers are highly encouraged to start tax planning now to maximize tax savings.
Impact on your business: If you wait until 2026, the current amount will be decreased by half. The exemption will revert to pre-2018 levels, about $5 million for individuals (adjusted for inflation), which is significantly lower than the current level of $13.61million (for 2024).
Next steps: Reach out to Aprio to get started on tax planning as early as possible. Protect your assets, maximize tax savings, and transfer wealth with ease with Aprio.

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The full story:

When you have built a successful business and want to protect its legacy, proactive tax planning is an essential aspect in ensuring your business thrives long-term. By understanding the complexities of the current tax landscape and consulting with a qualified tax advisor, you can get a personalized plan that aligns with your specific goals.

While the current estate and gift tax exemption allows individuals and franchise owners to transfer a significant portion of their wealth to their loved ones tax-free, it is important to engage in robust tax planning to ensure a smooth financial future — especially because the current exemption levels are expected to sunset in 2025.

What is the estate and gift tax exemption?

The estate and gift tax exemption gives individuals and married couples the chance to gift certain amounts free of federal gift and generation-skipping transfer (GST) taxes. The exemption amount nearly doubled under the Tax Cuts and Jobs Act of 2017 (TCJA) but is set to revert to the much lower pre-2018 levels by the end of 2025. This creates an ideal estate planning opportunity for individuals and families looking to maximize their wealth and assets.

The estate and gift tax exemption holds significant importance for franchise owners. Since franchise owners often build their businesses around a specific brand and operating model, the exemption may be crucial to ensuring business continuity. By leveraging the exemption, franchise owners can more easily transfer franchise ownership, reduce tax burdens upon inheritance, and utilize flexible estate planning for their heirs.

Why you should start tax planning now

In 2024, the federal gift and estate tax exemption increased to $13.61 million per person. This is more than double the exemption amount upon passage of the TCJA in 2017. Inflation adjustments prompted the U.S. Internal Revenue Service (IRS) to expand gifting opportunities. Therefore, as of January 1, 2024:

Individuals can transfer up to $13.61 million and married couples can transfer up to $27.22 million during their lives or at death.
Surviving spouses can use the deceased spouse’s unused federal estate tax exclusion (but not GST tax exemption) for lifetime gifting or at death.
Gifts to a non-U.S. spouse are limited — the first $185,000 is not included in the total amount of taxable gifts.

This temporary increase is not meant to last forever. The current amounts are initially scheduled to decrease in half at the start of 2026. It’s important to note that the federal estate tax rate for inherited stocks, cash, or other assets in excess of the exemption amounts can be as high as 40%.

However, the TCJA provides opportunities to leverage this higher exemption prior to its December 31, 2025, expiration date. Below are some tax planning opportunities:

Family transfers: Transfer assets to low-income family members.
Spousal exemption: Utilize their complete lifetime exemption by gifting assets while preserving the other spouse’s exemption.
Spousal lifetime access trust (SLAT): Married couples can enjoy the benefits of the current gift tax exclusion while also receiving income distributions.
Grantor retained annuity trust (GRAT): Allows tax-free gift transfers of assets to the succeeding generation.

The sunset of the estate and gift tax exemption is just under two years away, so starting your tax planning as early as possible will help you in the years to come. Proactive tax planning allows you to understand your current tax situation and identify strategies to maximize financial resources and prepare for potential future tax changes. Whether you anticipate exceeding the 2026 exemption or simply want to optimize your current tax situation, the time is now to consult with a qualified tax advisor to improve your financial portfolio and achieve long-term financial security.

The bottom line

As a responsible franchise owner, thinking about the future of your business is crucial. Aprio’s dedicated accounting team can help you leverage the current estate and gift tax exemption, so you can secure your franchise’s legacy and ensure a smooth transition for your loved ones. However, the exemption amount is subject to change — and that’s why it’s imperative to act now.

Aprio’s Restaurant, Franchise, and Hospitality team provides tailored solutions and proactive tax services to minimize financial burden and improve your franchise’s long-term success.