Will my heirs owe estate tax on my business?
A business owner's estate owes federal estate tax only on the value above the lifetime exemption, which 2025 legislation set at a higher, inflation-indexed level from 2026, and some states impose their own estate or inheritance tax at much lower thresholds. The business is valued at fair market value at death. Lifetime gifts, trusts, and buy-sell agreements change the answer — if they are in place before they are needed.
Law changing — verify before acting
A rule behind this answer changed recently. Confirm the current treatment with an advisor before acting.
Key points
- Federal estate tax applies only to estate value above the lifetime exemption, which 2025 legislation set at a higher, inflation-indexed level beginning in 2026.
- A privately held business is included in the estate at fair market value on the date of death, which generally requires a professional appraisal.
- Some states impose their own estate or inheritance tax at thresholds far below the federal exemption, so an estate owing nothing federally can still owe state tax.
- Lifetime gifts, irrevocable trusts, and a funded buy-sell agreement reduce the taxable estate or provide liquidity only if they are in place before death.
- The federal estate tax return is Form 706, and filing it lets a surviving spouse preserve the deceased spouse's unused exemption even when no tax is due.
How is federal estate tax calculated on a business owner's estate?
The gross estate includes everything you own at death, valued at fair market value: the business, real estate, investments, retirement accounts, and life insurance you control. Debts, administration costs, and transfers to a surviving spouse or to charity are deducted. Federal estate tax is owed only on what remains above the lifetime exemption under section 2010, which the One Big Beautiful Bill Act, P.L. 119-21, set at a higher, inflation-indexed level beginning in 2026 rather than letting it fall as prior law would have. Because the figure indexes each year, confirm the current amount before building a plan around it.
The unlimited marital deduction means assets left to a spouse are usually not taxed at the first death; the tax question arrives at the second. Filing Form 706 at the first death, even when no tax is due, elects portability so the survivor can use the deceased spouse's unused exemption.
Does state estate or inheritance tax apply too?
Roughly a dozen states and the District of Columbia impose their own estate tax, and a handful impose an inheritance tax on the recipient, several at thresholds far below the federal exemption. An estate that owes nothing federally can still owe a meaningful amount to a state.
Your state of domicile and the states where you own real property both matter. A plan built only around the federal figure can miss a real state liability, and moving domicile late in life without changing where property sits does not always solve it.
How is a private business valued for estate tax?
The business is valued at fair market value on the date of death: what a willing buyer would pay a willing seller, neither under compulsion, both informed. For a private company that means a qualified appraisal, not an owner's estimate or a book value. A profitable business with a strong customer base is often worth far more than the owner assumes, which is how an estate that felt modest ends up over the threshold once the company is properly valued.
Where the estate holds only a fractional or non-controlling interest, the appraiser may apply discounts for lack of control and lack of marketability, which can reduce the taxable value. Those discounts must be supported by the appraisal and the governing documents.
What planning reduces the exposure, and what are its limits?
Lifetime gifts move value out of the estate using the annual exclusion each year and the lifetime exemption as needed. Irrevocable trusts can hold assets outside the taxable estate when properly designed. A buy-sell agreement funded with life insurance sets the price for the business interest and supplies the cash to pay tax without forcing a sale. Charitable structures reduce the taxable estate while supporting causes the owner cares about, and section 6166 allows the estate tax attributable to a closely held business to be paid in installments over a period of years.
The honest limits: every one of these must be in place before death, and a plan rushed at the end loses most of its power. Gifted assets carry the donor's basis, while assets held until death receive a stepped-up basis under section 1014, so gifting highly appreciated interests can trade an estate tax saving for a future capital gains cost. An attorney drafts the documents and a CPA models the estate math and coordinates the valuation, ideally years before the plan is called upon.
Watch Mena explain this
Related strategies
- §170Bunching, donor-advised funds, and private foundationsCapital outlay
- §1361–1379Choosing and changing your business entityNo outlay
People also ask
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- What is a buy-sell agreement and why do partners need one?
- Do I need a trust as a business owner?
- What is the most tax-efficient way for a business owner to give to charity?
Sources
Related guides: arab american business owners, asset protection
Mena Hemaia, CPA, CIA
Chief Executive Officer, Accountack — West Palm Beach, Florida
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