If you’re like most Texas business owners, the idea of losing a significant part of your business to taxes when you hand it down or sell can keep you up at night. You’ve built your company over decades, hoping it would provide for your family, employees, or community. As you consider succession, it’s natural to wonder if unexpected tax obligations could jeopardize what you’ve worked so hard to create. It’s easy to assume that Texas law shields you from major tax issues, but federal rules and the realities of succession can catch even the savviest owner off guard.
Many people underestimate how easily tax liabilities can erode family wealth unless planning starts early. If keeping your business and your family’s future secure matters to you, understanding the nuances of succession tax planning is essential. Since 2008, we have guided business owners across Texas through these pivotal decisions, helping them minimize unnecessary tax burdens and protect what matters most. Our practical experience with succession planning in real Texas businesses gives us a clear view of what works, what fails, and how to ensure your transition supports your long-term goals.
Why Tax Planning Is Critical for Texas Business Succession
For many Texas business owners, transitioning the company to the next generation feels rewarding and natural. What often comes as a surprise is the range of tax consequences that can accompany a business handoff. Without thoughtful planning, federal estate taxes, gift taxes, and capital gains taxes can shrink what was intended for family or trusted successors. Texas does not have a state estate or inheritance tax, which provides some relief, but this safety net is partial at best. Federal tax laws are still very much in play, and these can affect even modestly sized businesses.
As the value of business assets, real estate, and cash reserves accumulate, families can find themselves facing liabilities in the six-figure range, often just above current federal exemption thresholds. We have seen this scenario firsthand with business owners in San Antonio and throughout Texas. In one instance, a family-owned company faced a substantial federal tax bill that could have forced the sale of core business assets. Because they involved us early, we developed a transfer strategy using lifetime exemptions and carefully sequenced transfers to dramatically reduce the family’s exposure. Tax planning goes far beyond paperwork—it is about protecting your legacy and supporting the business’s ongoing success.
Understanding Federal Estate and Gift Tax in Succession Planning
Texas business owners frequently ask whether they really need to worry about estate and gift taxes. The short answer is yes. While Texas skips a state estate tax, all residents are subject to federal estate and gift tax rules. As of 2023, the federal estate and gift tax exemption is $12.92 million per person. It might sound like a high bar, but it is surprisingly easy for business owners’ estates to reach or exceed this figure when you include business equity, real estate, and other financial assets. Federal estate tax applies to the estate’s value above the exemption level, with rates climbing as high as 40%. Lifetime gifts reduce this exemption, dollar for dollar. If you gift a $3 million ownership stake in your business during your life, your remaining federal exemption falls to just under $10 million at death. These calculations get more complex for closely held or family-owned businesses, mainly because valuations are less straightforward and can fluctuate quickly. Business transitions—whether through family limited partnerships, buy-sell agreements, or corporate recapitalization—can help manage tax exposure. However, missing paperwork, informal transfers, or failed appraisals often leave families open to scrutiny and unexpected liability. It is critical to review the current exemption limits, track law changes, and understand how every transfer method affects your overall position.
Capital Gains Tax: The Hidden Cost of Selling or Transferring Your Business
Even if estate tax is not an immediate concern, capital gains tax can quietly undermine your succession plans if overlooked. Many owners planning to sell or gift the company do not realize how this tax can affect the ultimate value received by family or successors. Capital gains tax is triggered when a business or its assets are sold for more than the original investment, known as the basis. If you gift business shares during your lifetime, the recipient takes on your basis, which can lead to a hefty capital gains bill if they later sell. On the other hand, when heirs inherit a business, they typically receive a new cost basis set at the current market value—a “step-up” that may reduce or eliminate tax if they decide to sell soon after inheriting.
It is a common misconception that gifting always avoids capital gains. For example, transferring your business to children during your lifetime can seem straightforward, but it may set them up for a significant tax hit later on. With careful planning—sometimes using trusts or installment sales—owners can defer or minimize this liability, but it requires precise timing and documentation. Suppose you invested $500,000 in your business and its value grew to $3 million by the time of succession. If you choose to sell, you would be taxed on the $2.5 million gain. The method of transfer and the sequence of gifts or sales can make a dramatic difference in how much of that gain is taxed, and when.
Comparing Succession Strategies: Sale, Gift, or Trust
Selecting how to transfer your business is just as important as deciding when. The primary strategies—outright sale, gifting, or using a trust—each present a distinct tax profile. A business sale to a family member or outside party creates immediate capital gains tax but can generate liquidity for the owner. Installment sales may spread the gain over several years, softening the tax impact if structured properly. Gifting business interests is a common way to keep the company in the family and gradually use your lifetime exemption, but doing so during your lifetime passes your cost basis to recipients, which can create a future tax problem when they sell.
Trusts, such as Grantor Retained Annuity Trusts (GRATs) or other irrevocable trusts, allow you to move business appreciation out of your estate, especially if you anticipate future growth. These trusts require careful setup, ongoing administration, and professional appraisals—often missed by busy owners. Failing to annually review business value can prompt tax authorities to challenge the legitimacy of a transfer. Timing is a crucial factor. Combining sales, gifts, and trust contributions over several years can reduce both gift and estate tax exposure, keep control in the hands of the current owner, and create a smoother transition for successors. Owners who plan proactively tend to have far more flexibility and control over the outcome.
Common Tax Planning Pitfalls in Texas Business Succession
Many Texas business owners operate under the mistaken belief that the state’s lack of estate tax means they are safe from significant tax burdens at succession. In practice, we have seen federal taxes create major headaches for families who thought they were in the clear. Knowing what to watch out for can help keep your business and family protected. One common error is relying on informal transfers or handshake agreements. Without up-to-date business valuations or proper documentation, such transfers risk IRS scrutiny, penalties, and the possibility that the IRS will re-value gifts or sales at higher amounts, resulting in unexpected taxes.
Another frequent misstep is using a generic estate plan or will as the only planning tool. Business succession introduces complexities that standard documents rarely anticipate, such as voting rights, succession of key staff, and buy-sell arrangements. Failing to integrate business strategy with overall family estate planning is another trap. Tools like minority interest transfers, annual exclusion gifts, and structured sales can optimize the outcome, but only when coordinated early and reviewed over time. The most successful transitions we’ve supported started with a thorough inventory and valuation, followed by scheduled transfers that blended gifts, sales, and trusts to make the most of both tax law and family needs.
How Professional Guidance Maximizes Tax Savings
Effective succession tax planning is as much about strategy as it is about law. For Texas business owners, it starts with a thorough review of your business structure, financial condition, and goals for succession. From there, we coordinate with your accounting and financial advisors to design a plan that uses the best tools available—whether that includes gifts, sales, trusts, or a mix of strategies.
At The South Texas Business Lawyers, we offer ongoing legal support through membership programs. This approach puts proactive planning within reach for owners and families who might otherwise be hesitant to engage a business law firm. Regular reviews and updates help you adapt to changes in law, valuation, or your own goals—meaning you always have a plan that fits your needs, both now and as things evolve. Experience has shown us that long-term relationships yield the best outcomes. Mistimed gifts, missed deadlines, or overlooked changes in tax law can create major problems that persistent, proactive guidance could have prevented.
Protect Your Texas Business Legacy—Let’s Build a Succession Plan That Works for You
Your business represents decades of work, vision, and dedication. Tax planning in business succession is about more than just saving money—it is about preserving a legacy for future generations and keeping your options wide open. With deeply rooted experience serving Texas businesses and a commitment to accessible, ongoing counsel, we believe every owner can achieve a transition that honors their hard work and protects their loved ones. If you are ready to discuss how succession tax planning could shape your business and family’s future, reach out today for a confidential consultation or browse our resources on proactive business strategies.