Business Succession Planning

The five events a plan must answer

A buy-sell agreement should address each triggering event:

• Death — who buys the interest from the owner’s estate, at what price and with what money.
• Disability — when incapacity triggers a buy-out and who manages until then.
• Retirement — whether an owner can sell back the interest and over what period.
• Departure — what happens when an owner quits, is removed or competes.
• Divorce — in California a spouse may hold a community property interest; the agreement can give the company or the other owners a right to buy it.

Buy-sell agreements: cross-purchase or redemption

In a cross-purchase agreement, the remaining owners buy the departing owner’s interest, often funded by life insurance each owner holds on the others. In an entity redemption, the company buys the interest back. In Connelly v. United States (2024), the U.S. Supreme Court held that life insurance proceeds a corporation receives to redeem a deceased owner’s shares increase the company’s value for estate tax purposes, with no offset for the redemption obligation — so many owners are reviewing redemption agreements funded with company-owned insurance.

Setting the price

The agreement should say how the price is determined — a fixed price updated regularly, a formula or an independent appraisal at the time of the event — and how it is paid, whether in a lump sum funded by insurance or in installments. An unrealistic or outdated price is a common source of disputes, and a price that does not reflect fair market value can create estate tax problems.

Holding business interests in a trust

Transferring shares or LLC membership interests to your revocable trust keeps them out of probate and lets your successor trustee act without delay, but the transfer must comply with the company’s operating agreement or bylaws. S corporation shares require care: a revocable trust is a permitted shareholder during the owner’s life, and after death a trust holding S corporation stock must meet specific rules — such as a qualified subchapter S trust or an electing small business trust election — to preserve the S election.

Management succession

Ownership can pass to family members who are not involved in the business while management passes to a key employee or to one child. Voting and non-voting interests, a board or manager structure and employment agreements can separate control from economic ownership. A written emergency plan — who signs checks, who talks to lenders and customers — protects the business in the first weeks after an unexpected event.

Treating children fairly, not always equally

Families often have one child in the business and others outside it. Options include leaving the business to the active child and equalizing with other assets or life insurance, giving non-active children non-voting interests, or a buy-out over time. The plan should reflect what each child contributes and what the family considers fair.

Real estate and property tax

Business real estate is often held in a separate LLC. Under California law, a transfer of more than 50% of the ownership or control of a legal entity that owns California real property can trigger reassessment of that property (Revenue and Taxation Code §64(c)), and cumulative transfers of more than 50% of the original co-owners’ interests can as well (§64(d)). The Proposition 19 parent-child exclusion covers only a family home or family farm, so commercial and rental property passing to children is generally reassessed.

Estate tax and valuation

A closely held business is valued at fair market value for estate tax purposes. Discounts for lack of control or marketability may apply to minority interests, and an estate in which a closely held business makes up a large share of the value may be able to pay estate tax in installments (Internal Revenue Code §6166). With a federal exemption of $15 million per person in 2026, many owners will not owe estate tax, but valuation still matters for buy-outs and for fairness among heirs.

Keeping the plan current

Review the succession plan and the buy-sell agreement when owners join or leave, when the business’s value changes significantly, when insurance policies change or when an owner’s family changes. An agreement written for the business as it was ten years ago may not fit the business you run today.