It’s never too early to develop an estate plan for your convenience store chain to ensure a smooth transition of the business should the unexpected occur.
Changing tax laws, which impact estate planning, are seemingly always on the agenda of our lawmakers. While keeping up with the endless proposals and the all-too-real legislative changes can be challenging, they present opportunities for strategic planning.
Without congressional action, for instance, at the end of 2025, the federal estate tax exemption will be reduced to approximately $7 million per individual (before adjustments for inflation) thanks to the 2017 Tax Cuts and Jobs Act (TCJA). Exacerbating the situation, the current 40% maximum gift and estate tax rate will also increase to 45% in 2026 — the highest estate tax rate since 2009.
With the generous exemption limit set to expire in two years, higher net-worth individuals (those with $10 million or more) should be thinking about estate planning now. But it’s not only high net-worth convenience store owners who might want to consider setting up some type of trust.
Trusts & Gifts
A retailer might transfer his or her operation’s assets to family members while retaining a source of income for themselves by using a Grantor Trust. If the assets grow over the trust’s term, the appreciation will not be subjected to estate taxes, making them effective planning tools for a rapidly growing convenience store business.
Another option is the “Family Limited Partnership” or a “Family Limited Liability Company.” A limited partnership can be formed to hold the assets of a business. Some of the limited partnership units can be transferred to others, potentially eliminating the units from an otherwise taxable estate.
When it comes to the inter-related gift tax, because limited partnership interests do not carry control of the convenience store partnership, the value of the transferred assets may be discounted for gift tax purposes.
Gifts reduce the size of the estate, and if under the limit avoid the gift tax. The gift tax limit in 2023 is $17,000. For couples, the limit is $17,000 each for a total of $34,000. The limit is estimated to be $18,000 in 2024 and $19,000 in 2025.
The gap between what the business is worth during the estate planning stage and what it is worth when the owner passes away may be managed by creating an “Irrevocable Life Insurance Trust” (ILIT). ILITs must be irrevocable, but structured correctly, the benefits paid from the underlying insurance policy do not pass through probate and are
immediately available to provide cash for estate taxes.
States Rules Vary
Estate planning should also take into account the potential bite of state governments.
Although an estate might not be impacted by the federal estate tax, doesn’t mean it won’t be subject to estate taxes levied by a state. Twelve states and the District of Columbia currently impose their own estates tax with exemption amounts that are much lower than the federal exemption limits. Massachusetts and Oregon, for example, exempt only $1 million.
Six states also levy an inheritance tax which is paid by the heirs. And, for the record, Maryland has both an estate and an inheritance tax. Obviously, including the potential state bite in estate planning can ensure heirs will benefit to the extent desired by retailers with estates that might not be worth millions of dollars.
Looking Ahead
The recently passed Setting Every Community Up for Retirement Enhancement Act (SECURE Act) made numerous changes that will impact the heirs of every convenience store owner saving with an Individual Retirement Account (IRA). The SECURE Act ended the use of a so-called “Stretch IRA.” Stretch IRAs allowed beneficiaries to take distributions
for an inherited IRA based on their life expectancy. It allowed the bulk of the IRA funds to remain in the tax-deferred retirement account for decades.
The 2024 presidential campaigns are already heating up and each party’s platform could impact every retailer’s estate plans. There is also the administration’s budget plan, which includes proposed law changes, such as those which would eliminate certain grantor trusts, eliminate the step-up basis upon death and limit the annual gift tax exclusion to $50,000 per donor rather than $17,000 per donor.
Obviously, not all of these changes will become aa reality. However, when it comes to coping with changes — real and proposed — to come up with a viable estate plan, every convenience store owner will require the assistance of an experienced professional.
