Urgent Succession Planning: ESOPs Key for Construction Owners Amid Tax Risks

Anita Mahamed, a CPA and partner at Milwaukee-based Wipfli, is sounding the alarm for construction company owners regarding the urgency of succession planning amidst potential tax changes. With a Republican-controlled Congress and presidency on the horizon, there’s a chance that current tax exemptions might be extended, but waiting for certainty could be a costly gamble. The looming reduction in the lifetime estate and gift tax exemption—from nearly $14 million per person to about $7 million in 2026—poses a significant threat to wealth transfer strategies. Under the current law, married couples can transfer nearly $28 million without incurring federal estate or gift taxes, but that window may soon close.

So, what’s a construction company owner to do? Mahamed suggests proactive measures, particularly embracing employee stock ownership plans (ESOPs). These plans are emerging as a powerful tool for owners looking to transition their businesses. In an industry where finding buyers with deep pockets can be tough, ESOPs offer a unique solution. Unlike traditional buyers who often prefer asset purchases for tax advantages, ESOPs facilitate stock transactions that can lead to more favorable capital gains tax treatment for sellers. This flexibility allows owners to sell a portion or their entire company while maintaining some control over the transition process.

One of the most attractive features of ESOPs is that they allow owners to spread their capital gains over time through seller financing arrangements. This strategy is particularly beneficial in today’s high-interest-rate environment, enabling owners to maximize their financial outcomes while minimizing immediate tax burdens. Beyond the immediate financial implications, ESOPs can also enhance estate planning. Owners can transfer remaining shares to future generations outside the ESOP, leveraging the current high exemption levels before potential policy changes take effect.

The advantages of ESOPs extend far beyond just tax efficiency. As the construction industry braces for a significant technological shift—whereby machines will perform more tasks than humans by 2025—employee ownership becomes even more critical. Employee-owners are generally more inclined to embrace new technologies, recognizing that these investments benefit the company and their own job security. The collaborative culture inherent in construction firms positions them well for successful ESOP transitions, fostering a sense of teamwork that can drive innovation and growth.

Moreover, integrating philanthropic goals into succession planning through ESOPs can yield additional benefits. Selling to an ESOP not only provides liquidity for estate planning but also opens doors for charitable giving, which is not subject to estate tax. This dual benefit can align personal values with business objectives, creating a win-win scenario for owners.

However, navigating the complexities of succession planning requires immediate action. Construction company owners must work closely with their CPAs and attorneys to identify tax-efficient strategies tailored to their unique circumstances. Key considerations include evaluating company structure—only C and S corporations can benefit from ESOPs—and exploring options like the IRC Section 1042 election, which allows for deferring gains by reinvesting in qualified property.

As the clock ticks toward 2025, the construction industry stands at a critical juncture. The intersection of high exemption levels, flexible ESOP structures, and a strong collaborative culture creates an unprecedented opportunity for thoughtful transition planning. Instead of waiting for potential policy changes, construction companies should focus on building the necessary infrastructure to capitalize on these tax benefits while they remain available. The future of succession planning in construction hinges on proactive measures, and those who act decisively now will be better positioned to secure their legacies.

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