As the tail-end of the baby boomer generation approaches retirement, the landscape of estate planning for business owners is rapidly evolving. This transition brings both opportunities and challenges, particularly in light of new technologies and the digitization of estate planning. However, recent studies reveal a troubling trend: a significant decline in estate planning across key demographics, including older Americans and business owners.
Christine Rew Barden, a shareholder in Reinhart’s Trusts and Estates Practice and chair of its Family Offices Service Group, sheds light on this concern: “When I entered the legal profession in 1989, it was in a large Chicago law firm. We had a robust department that served its own clients, as well as executives of corporate clients. The federal estate and gift tax exemption was $600,000 per person with a top effective rate of 55%. Almost everyone needed an estate plan to deal with that low exemption.”
The landscape has changed dramatically since then. Barden notes, “With the exemption increasing over time, I think there has been a (wrong) assumption that estate plans aren’t needed, and that this was a ‘risky’ area in which to practice.” This misconception has led to a concerning trend in the industry.
According to recent studies, estate planning among older Americans is decreasing, with an overall decline of 6% in estate planning rates. Even more alarming, there’s been a 16% drop among lower-income Americans. For business owners, the stakes are particularly high. Approximately 85% of successful business owners have outdated plans, an oversight that could lead to unintended consequences, especially given the frequent changes in tax laws and personal circumstances.
Barden emphasizes the continued importance of estate planning: “The opposite has happened. The larger exemptions have freed so many individuals to plan around issues other than taxes. And for those that are still exposed to the estate tax, the need to plan is critical.”
This shift in focus highlights why estate planning remains crucial for business owners of all sizes. While many might assume estate planning is only for the ultra-wealthy, the reality is quite different. Barden explains, “We serve entrepreneurs who are growing businesses, children of high-net-worth clients, and other pillars of our communities.”
Estate planning plays a fundamental role in ensuring the orderly transfer of assets, reducing legal and tax complications, and protecting a business’s future. Key reasons for prioritizing estate planning include asset protection, tax minimization, and business continuity. With the rise of digital estate planning tools, these crucial tasks are becoming more accessible and manageable for business owners of all ages. However, the digital age has introduced new complexities to estate planning.
Digital divide
In today’s digital landscape, a business owner’s online presence is as significant as their physical assets. Social media accounts, emails, digital photos, and other virtual assets make up a considerable part of personal and financial lives. For many entrepreneurs, their online businesses, blogs, and domain names represent substantial portions of their company’s value. These digital assets carry not just financial worth, but often significant emotional and sentimental value as well.
To address these digital assets, estate planning must evolve. A comprehensive inventory of digital assets is crucial, including professional social media accounts, financial accounts, email accounts, online businesses, digital collections, and utility accounts for digital systems integral to the business.
Legal considerations add another layer of complexity. Many online platforms have their own policies for handling accounts after an owner’s death. However, these preset options may not align with a business owner’s specific wishes or the needs of their company. This discrepancy underscores the importance of addressing digital assets explicitly in one’s estate plan.
Barden emphasizes the importance of professional guidance in this complex landscape: “I always counsel against the use of using any online or AI programs for personal estate planning documents. I’ve been hired by many a family to sort out the mess inadvertently made by a loved one who implemented a DIY estate plan. It costs much more to fix on the back end, than to do it right on the front end!”
Death (and) taxes
Protecting digital assets isn’t the only thing causing worry for clients. Among other concerns for those looking at retirement in the very near future is the 2025 sunset of the estate tax exemption.
Barden sees clients concerned about exposure to the 40% estate tax on Jan. 1, 2026, that they won’t have on Dec. 31, 2025. Add in uncertainty about the future landscape, and you have clients being incentivized to make large, irrevocable gifts to use their exemptions relatively early in life, which is not a comfortable plan to execute.
“We see retirement accounts and 529 plans that have, thanks to a robust stock market, become an outsized portion of clients’ total assets,” explains Barden. “[There are] concerns that death is the only way to avoid the tremendous capital gains built into those assets. Fortunately, we have a system of marital property law here in Wisconsin that provides a step-up in cost basis upon the death of a first spouse, but having death as an exit strategy is not ideal.
“Taking care of children through a retirement plan is no longer as attractive as years ago, now that those children (under current law) must take out and subject the entire account to income tax within 10 years of the account owner’s death,” Barden continues. “One of our strategies to address this, if the client is charitably inclined, is to force all desired charitable gifts out of those pre-tax retirement plans, leaving more post-tax money for the family and allowing the charity to use its tax-exempt status to shelter its gift from income tax.
“If a client is not charitably inclined,” Barden adds, “they see the current tax law governing retirement plans as an additional tax — income plus estate tax — on their desire to pass all assets to their children or other (non-spouse) family members.”
For Wisconsin business owners, there’s some good news. Barden notes, “We are fortunate in Wisconsin — we do not have a gift or estate tax. Also fortunate, in this context, is our Wisconsin system of marital property.” This system provides unique benefits for married couples in terms of asset valuation and potential tax savings.
When one spouse dies in Wisconsin, all property that is deemed marital property is valued at its fair market value (FMV) on that first spouse’s date of death. That FMV becomes the new cost basis for the surviving spouse, meaning that the surviving spouse can turn around and sell any asset — real estate, stocks, or bonds — and likely avoid significant capital gains tax on the proceeds.
“Contrast [that to] our neighbors to the south [in] Illinois,” notes Barden. “Illinois levies a separate, state estate tax on estates in excess of $4 million. Also, being a common law state, when one spouse dies, only the assets owned by that spouse (or one-half of a joint asset) receive a step-up in the cost basis to the FMV on the date of death. This impacts all citizens — business owners/operators included.”
Despite these advantages, the declining rate of estate planning is a pressing issue. Barden shares: “I am always shocked to have 80-year-old couples come in to my office stating they have no estate plan. To spend your life creating a family and wealth, only to leave it exposed to the vagaries of state default laws and personal whims astounds me.”
For business operators wondering what they should have in place, Barden recommends the following, at a minimum:
- Signed operating agreement and buy/sell agreements;
- Powers of attorney (financial and health care); and
- A will, revocable trust and, if married, a marital property classification agreement.
Also, transfer on death (TOD) designations on business interests as well as retirement accounts, cash/investment accounts, and real estate are crucial, Barden states.
The message for business owners — especially younger entrepreneurs — is clear: start planning early. The digitization of estate planning provides a unique opportunity to easily create, update, and manage plans. By taking advantage of these tools and seeking professional advice, business owners can secure both their business and personal legacy for the future, ensuring their life’s work continues to thrive long after they’ve stepped away from the helm.
Barden adds a powerful reminder: “Having a plan is critical to preserving wealth earned over a lifetime and, more importantly, preserving peace and intact family relationships that would be forever harmed by leaving a family to ‘sort it out’ by themselves after the death of a key family member. Particularly in this day of blended families, it is important to have a well-designed, properly executed estate plan in place.”
An estate plan in 5 parts
According to the attorneys at Murphy Desmond Lawyers S.C., an estate plan usually involves the preparation of five documents. Each one serves a special purpose in handling a person’s physical and financial affairs in the event of death or disability.
- A will is a document that gives direction about how to distribute a deceased person’s property. It designates a person (referred to as the “personal representative” or “executor”) who the will maker chooses to administer his or her estate. A will also designates a “guardian” or person chosen to raise minor children.
- A trust is a document whose primary purpose is the avoidance of probate court proceedings. A trust outlines specifics such as when a person is to receive an asset. (For example, the trust maker can choose to hold off on giving money to someone until he or she reaches a certain age.) When assets are held in a trust, they are not subject to administration by a probate court.
- A marital property agreement can be done prior to marriage or during marriage. It is a document which helps classify the ownership of a couple’s assets as “yours, mine, or ours.” Then, when one spouse passes, his or her property is handled separate from the surviving spouse’s property, so as to avoid mixing the two. Most people think of marital property agreements in the context of a divorce, but they are highly useful for estate planning. They are especially important for couples with children from prior relationships. Without a marital property agreement, there can be much confusion as to what property should be administered by the deceased spouse’s estate.
- A financial power of attorney is a document that enables a living person to designate another to manage his or her finances while he or she is still alive. The document can empower the designated person to handle the finances whenever the maker directs them to do so, or when the maker becomes incapacitated. After the person’s death, the financial power of attorney expires.
- A health care power of attorney allows a person chosen by the maker (of the health care power of attorney document) to make medical decisions if the person is incapable of making decisions for himself or herself.
