Estate Plans are Vital for Small Business Success
October 20, 2025Imagine a successful business, built over decades on a foundation of hard work, sacrifice, setbacks, and perhaps course changes as well as updates leading, ultimately, to rising profits and an enviable reputation in the industry.
Now imagine that business in limbo when the founder dies: accounts frozen by the bank, payroll unmet, suppliers unpaid, customers left without deliveries. The probate court spends weeks making decisions impacting the business based only on current laws without input from the founder, the family, employees, suppliers, vendors, customers, or industry leaders. Customers jump ship to access competitor products because they, in turn, must get supplies and fulfill orders. The business’s value and reputation are the casualties, along with the founder’s dreams of an enduring legacy.
The moral of this story? Create a coordinated plan that clearly identifies who will receive the value of the owner’s financial interest in the business, along with a business succession plan to ensure a smooth transition and business continuity if those in charge today are unable to lead tomorrow.
What would happen to my business without me?
“Begin with the end in mind,” is a phrase popularized by the educator, author, businessman, and speaker Stephen Covey and a useful approach for the first step in planning for the future of your business if you are incapacitated or disabled and when you die.
What is your vision for your business?
- Do you want to reap value and plan to sell the business after a period of time, perhaps close to your retirement age?
- Is this a venture you would like your children and perhaps grandchildren to continue? Would they be interested in, and capable of, running the business after you step down or pass away?
- Would you prefer to sell the company to employees who were integral to its success?
These are the types of questions that lawyers and business advisors ask because the answers determine how you will plan for the end of your tenure as the business’s leader. Better yet, they can be very helpful in defining the business as you create it.
Who would you want as a key person responsible for acting on your behalf during a transition?
- Banks can respond to such an interim leader or successor so there is no interruption in the movement of business funds.
- Customers can trust and rely on this key person so that valuable relationships are not lost.
- Employees can feel reassured that their futures are not in jeopardy if they remain loyal to the business.
What tools would you want in place to smooth the transition? For example, a life insurance policy can help fund a transition.
Whether a multi-million-dollar company or a small shop with a bell ringing over the door, change brings with it unrest and confusion. Your answers to these questions can inform a plan that avoids delays and expenses imposed by a probate court, sets realistic expectations, and allows your successors to focus on day-to-day operations while they consider strategic challenges.
Can I give my loved ones peace of mind?
Questions to be considered are dependent on business type (e.g., corporation, limited liability partnership, general partnership, sole proprietorship, non-profit) because business type impacts how ownership is transferred. For example, the spouse of a dentist, who did not study in the field nor is licensed to practice medicine, cannot take over the dental practice and must sell it when the dentist dies.
- Is your business also your personal property?
- Since business management rights do not follow economic rights in an LLC without an agreement, how would you expect leadership to continue?
There are many types of documents that can be used to structure the future you envision: wills, trusts, buy-sell agreements, and more. It is important to coordinate your estate and business succession plans so they work in concert, because both are pieces of the same puzzle. When the succession of your business interest established in your estate plan is worked into your business’s governing documents, you can do much to ensure that the transfer of your economic interest in your business is compatible with the transfer of the leadership of your business. Ensuring a smooth leadership transition and continuous business operation not only builds trust among stakeholders to help retain employees, customers, and business value; these factors in turn support grieving and confused family members.
If planning sounds overwhelming, realize that you’re likely already thinking (maybe worrying) about the future. Simply putting those thoughts on paper can be an effective first step in relieving your concerns.
Planning is also an opportunity to confront difficult family situations and perhaps shield the business against potentially disgruntled family members and/or business partners.
- Consider three siblings, with the eldest working in the family business for decades. On the owner’s death, the value of the business is split evenly among them. If the eldest would like to continue the business, is it possible for that sibling to buy out the others who are uninterested, or even eager to avoid that future? Would they consider a loan to help the eldest slowly buy them out? If the matter goes into litigation, what happens to operations and value during those weeks, months, or years?
- What if someone forgot to pay the life insurance premiums that might have supported the key person identified to continue the business? What if the business owner became uninsurable since the plan was implemented?
- If business partners, and perhaps also family members, were to fall out to the point where one or more wants to quit the business, how would that scenario play out?
Most of us have worries, especially as they relate to those who are very close to us. There are legal approaches to minimize emotional pain and even avoid court (e.g., a clause that indicates a beneficiary would relinquish an inheritance if the will were disputed). A well-thought out plan can reduce emotional and financial stress during leadership changes in family businesses and address the complexities of family dynamics to ensure fair and equitable treatment of all beneficiaries.
Does estate planning benefit my business today?
Estate and succession plans are valuable for both the present and future. A well-thought-out plan demonstrates that the business owner has considered potential issues and taken action to avoid disruption. This proactive approach impresses investors, employees, and customers.
- Lenders might offer more favorable rates as they participate in growth plans that are characterized by stability and preparedness.
- Employees are more likely to remain loyal, reducing training and retention costs.
- Business valuation is enhanced by demonstrating foresight leading to a well-managed enterprise.
- Reputation is strengthened.
What’s the worst that could happen?
What if a paramour or administrative assistant visits a grieving family to claim an ownership interest in the business?
Expensive litigation might be necessary to deal with the claim and, to determine its legitimacy, while the business’ daily operation may be put in jeopardy. Clearly defining ownership, and transfer of that ownership, would relieve a significant amount of emotional stress on the family.
Per a business consulting agreement, can someone hired by the business owner to help increase business expect an equity interest in lieu of payment for unpaid services after the owner’s death?
Again, daily operation might grind to a halt during while ownership rights are determined, and the value of the business can fall. Not only is it important to create the right documents, but they should be reviewed every few years to make sure they are current and accurate.
If an accountant reported the business as belonging to one spouse, when the couple had assumed they were both reported as owners on tax and other documents, what can happen?
The surviving spouse may need to work through the confusion in probate court. In a similar situation, a business partner may assert a greater ownership than anyone expected. Accordingly, a regular review of all documents is wise.
What about taxes?
The value of a business might exceed the estate tax threshold ($15 million for one person, $30 for a couple in 2026) and the excess value would then be taxed at up to 40% (federal) and 12% (CT). If heirs do not have cash equaling approximately half the value of the business available to pay this debt, the business may need to be sold and the owner’s dreams of establishing a multi-generational family business would disappear.
There are strategies to avoid this situation if the owner believes the value could reach that level, as well as to address the possibility of capital gains tax in the case of a sale.
What should I do to implement an estate plan and a succession plan?
Successful business owners are good at creating a product or service the community needs – but may not be adept at translating their wishes for the future of their business into legal documents. It’s wise to have a reliable team of professionals, including a lawyer, banker, insurance broker, and accountant, to maximize business value and minimize risk and stress.
Answers are close at hand and it’s well worth the effort to envision a future you want.
William (Bill) Sherman practices in the areas of estate planning, trust and estate administration, commercial finance and real estate law. Bill represents high net worth individuals and small business owners in the creation and execution of complex estate and business plans. These plans often include sophisticated trusts and lifetime gifting to achieve succession planning and tax-efficient generational transfers of assets. Bill believes in providing plans that offer flexibility in the face of changing estate and gift tax laws.
