Donald Trump’s reelection, combined with the upcoming Republican control of Congress, may have eased some concerns that parts of the Tax Cuts and Jobs Act (TCJA) will be allowed to expire at the end of 2025. The two most relevant tax cuts to independent agents and brokers are the Qualified Business Income (QBI) deduction and the Estate and Gift tax exclusion amount. In both cases, independent business owners have benefited, either directly or indirectly since this bill was introduced. While there is a general belief that these exemptions will be extended beyond 2025, there are two points that brokers and owners should be considering while planning for the potential that there is no extension.
First, it’s important to understand that these two exemptions are currently in place now and guaranteed to be in place through the end of 2025. Second, despite the belief that these advantageous conditions will remain, there’s no reason why those who are considering perpetuating their business in the next few years shouldn’t begin planning now to maximize their advantage in this current environment.
Advantages of the TCJA for estate transfers, sales and more
A brief background: Beginning in 2018, the TCJA doubled the federal lifetime exemption for estate and gift taxes, increasing the exemption from approximately $5.49 million per individual in 2017 to $11.18 million in 2018, to be adjusted annually for inflation. For 2024, this exemption grew to $13.61 million per individual and $27.22 million for married couples.
These higher exemption amounts are scheduled to “sunset” at the end of 2025 unless Congress acts to extend them. If no action is taken by Congress, the exemptions will revert to pre-2018 levels. Adjusted for inflation, these will likely be around $6-7 million per individual in 2026. That is a significant difference, and that’s the point.
How to get today’s tax rates – tomorrow
If you were planning to transfer assets to a trust, there’s no reason not to continue to pursue that plan this year. Here’s perhaps the most important point: The estate tax exemption amount at the time of the transfer provides an incentive to complete said transfers this year. If you think there will be an exit from your business at any time after 2025, it might make sense to do the necessary estate planning now. Keep in mind, changes to your business ownership cannot be accomplished overnight. The process takes time both to plan out and to execute.
Economic factors are also a consideration
In addition to legislative risk, there is also economic risk. The economy has been strong, and firm valuations have been reflecting that fact. This can change. So, in addition to the tax benefits, there may be economic advantages to starting the transfer process sooner, rather than later.
The second point to keep in mind is that the QBI exemption is also part of the TCJA. If your brokerage is set up such that you receive pass-through income, you have benefited from the TCJA’s full exemption on the first 20% of income. If this component of the TCJA expires, or is not extended, take-home pay will be subject to more taxation and decrease as a result.
Intentionality makes the difference
Nothing is certain except death and taxes. Firm owners who succeed at transferring their businesses to either family, employees, or external partners succeed because they are intentional and plan. That’s always true. The advantages offered by the current tax code simply add another reason to be intentional today. The TCJA is the law of the land right now. But there remains a very definitive end-date for certain parts of the current tax code. If you take action today, you’ll know that you’re receiving the most advantageous terms. If you wait, you just don’t know.
Marsh, Berry & Company, LLC and MarshBerry Capital, LLC do not provide tax advice. A tax professional should be consulted separately before making any decisions that may have tax implications.
