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What franchises should know about expiring estate, gift-tax exemptions

Nina M. Daigle, tax partner in Aprio’s restaurant, franchise and hospitality segment, reveals how franchises may leverage the current exemption amount before it expires in 2026.

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May 28, 2024

At the end of 2025, several major provisions of the 2017 Tax Cuts and Jobs Act are set to expire. Of the expiring provisions, franchise owners who plan to pass their businesses down to their loved ones should pay special attention to the estate and gift tax exemption, which nearly doubled under the TCJA.

The estate and gift tax exemption provides individuals with the opportunity to gift a certain amount without being subject to federal gift and generation-skipping transfer taxes. For franchise owners, specifically, leveraging this exemption allows them to easily transfer franchise ownership, reduce the tax burdens associated with inheritance, and simplify estate planning for their heirs.

The current exemption amount allows franchise owners to transfer a significant portion of their wealth to loved ones tax-free. But, with the expiration of the TCJA in 2025, the exemption amount is set to revert to pre-2018 levels, meaning that franchise owners who plan to pass their businesses down will be subject to higher taxes than they would have in previous years.

This year, the exemption amount is higher than ever but not for long. As of Jan. 1, 2024, the U.S. Internal Revenue Service expanded the exemption to account for inflation. With this adjustment, the exemption amount increased to $13.61 million for individuals and $27.22 million for married couples, allowing them to transfer that amount in taxable gifts throughout their lives or through death. The current amounts are scheduled to be cut in half in 2026.

How franchise owners can prepare
With the expiration of the current estate and gift tax exemption being less than two years away, it is important to note that the TCJA allows for multiple opportunities to leverage the current exemption amount before its expiration, including the following:

Spousal exemption: Franchise owners can utilize their complete lifetime exemption by gifting assets while preserving the other spouse's exemption. By strategically transferring assets between spouses, both spouses can maximize their available exemptions and fully utilize them before the expiration of the TCJA provisions.

Spousal Lifetime Access Trust: A SLAT is a trust through which one spouse can gift assets to their spouse. Through this trust, the donor spouse can leverage their gift tax exemption to fund the trust, utilizing their own lifetime exemption, while the beneficiary spouse can receive income distributions from the trust without utilizing their own exemption. This strategy effectively removes assets from the donor spouse's estate while still allowing the beneficiary spouse to access them.

Family transfers: Another way to utilize the high exemptions of the TCJA is to transfer assets to family members in lower income tax brackets. This allows individuals, including franchise owners, to potentially reduce the overall tax burden for the donor and recipient.

Grantor Retained Annuity Trust: A GRAT is a trust that allows individuals and families to transfer wealth to their heirs without using a significant amount of their federal estate and gift tax exemption, significantly minimizing the amount of taxes associated with large financial gifts to loved ones. By establishing a GRAT before the expiration of the TCJA provisions, individuals and franchise owners can take advantage of the current high exemption amounts and potentially lock in tax savings for future generations.

Since this exemption, among others, is subject to change at the end of next year, franchise owners should establish a proactive tax plan to prepare for the changes. Not only will this allow owners to understand their current tax situation and navigate the expiration of the TCJA but will also help them effectively mitigate any additional changes as the regulatory landscape continues to shift.