“Constructing” Your Estate to Meet Your Needs

As an owner of a construction company, at some point you will need to determine what the next steps are for your legacy and the business you have built. 

It is important to take the time to reflect on your goals and how they will integrate with your estate and succession plans. Creating an estate plan is the best way to protect your business interests and beneficiaries. The main documents used to create an efficient estate plan are:

(a) Last Will and Testament – a document that expresses your wishes as to how your property is distributed after death.

(b) Financial Durable Power of Attorney – document which names someone to manage your financial affairs.

(c) Healthcare Power of Attorney- document that names someone to manage your medical decisions and care.

(d) Living Will – a document that allows you to predetermine your end-of-life care decisions.

(e) Trust Document – a fiduciary arrangement to hold assets for the benefit of a third party. Trusts help to avoid probate, create asset protection and aim to create estate tax savings. Many different types of trusts can be utilized to create the most appropriate estate plan. 

The first step in estate planning is to compile a list of your assets, (including business investments, real estate, retirement accounts, etc.) debts and insurance plans, to quantify your net worth. It is important to see how your net worth compares to your lifetime exemption amount. This is the amount of property or cash that you can gift either during your life or at death before having to pay the Federal Estate Tax. As of September 2023, this lifetime exemption amount is currently at $12,920,000 per person (if married you can utilize your spouse’s exemption as well for a total of $25,840,000). However, as of January 1, 2026, this amount is set to revert to the exemption amount from 2017, plus inflation (current industry experts estimate the number to be around $7.5 million per person). Any amount left in your estate, depending on the date of death, over these amounts will be subject to a 40% federal estate tax. Accordingly, it is important to begin thinking about how you can transfer your assets to lessen any pending estate tax. 

There are two major concerns as it relates to estates subject to the Federal estate tax if not planned properly. First, the Federal estate tax is due within nine (9) months after a decedent’s date of death. This can put severe strain on the fiduciaries to even make the payment in a timely fashion. In addition, the ability to generate the cash needed to pay the estate tax can not only be challenging, but it can also cause assets to potentially be liquidated for less than fair value in a distressed sale. It is common that many business owners do not have sufficient liquid assets to pay the estate tax upon death. Instead, the business that perhaps they wished to be carried on by the next generation is forced to be sold hastily to generate the cash needed to pay the tax, wreaking havoc on the decedent’s succession objectives and overall estate value. 

Some techniques specifically for business owners to avoid the aforementioned issues and utilize the lifetime exemption while it is at its highest level are as follows:

(a) Gifting the annual exclusion amount – you are entitled to transfer $17,000 (2023 amount) or $34,000 if married, per person per year without using any of your lifetime exclusion. 

(b) Gifting highly appreciable assets into a trust or to your children. By getting these assets out of your estate now, any future appreciation will be tax-free upon your passing.

(c) LLC Transfers – you can transfer ownership of assets (marketable securities, investment properties, etc.) into a single-member LLC, which can then be gifted to a trust or your children. If done correctly, you can likely take valuation discounts on the interests gifted. 

(d) Spousal Lifetime Access Trust – “SLATs” – assets are placed in an irrevocable trust for a donor’s spouse, the beneficiary spouse can receive distributions, and the trust is excluded from the donor’s and donee’s gross estate upon either of their passings. 

(e) Grantor Retained Annuity Trusts – “GRATs” - assets are placed in trust for a set number of years. During this time, the grantor is entitled to a rate of return. When the GRAT term expires, the leftover assets are given to the grantor’s beneficiaries. 

It’s equally as important to be thinking about how your estate plan coincides with the future of your business. The term succession planning is used to describe an exit strategy from a business so that it can continue to run smoothly or be wrapped up successfully. The four main pillars of succession planning are (1) merger, (2) inter-company or inter-familial transition, (3) sale, and (4) dissolution. A succession plan usually runs congruently with an estate plan.  

A merger (two or more businesses consolidating) or a transition (leaving the business to someone you trust) keeps the company running and can be used to produce passive income during your retirement. These work well when looking to continue the viability of the business. If you are looking to truly exit – a sale or dissolution may be more in line with your goals. To review a more detailed analysis of this topic, head to our Exit Plan Options page. 

About Schneider Downs Construction Services 

Led by a diverse group of shareholders and managers, Schneider Downs provides strategic and practical solutions for our construction clients in all facets of their business. Our dedicated team of more than 350 professionals have a wide background of tax, accounting, technological and business experience in the region, specifically in Pittsburgh and Columbus. 

To learn more, visit our Construction Industry Group page.