Estate Planning for Business Owners: Avoiding Family Disputes

When the founder of a family-owned business passes away, the impact can be both financial and personal. Even successful companies can face significant conflict if there isn’t a clear plan for how ownership and control will transfer to the next generation. This risk is particularly high when some children are actively involved in the business while others are not.

For example, one child might be managing job sites, handling bonding, or overseeing client relationships, while their siblings may have different responsibilities at the company or no involvement in the business. If the owner dies and leaves the business equally to all children, disagreements about leadership, control, pay, and profit distribution can quickly harm both the business and family relationships.

Fortunately, with proper planning, these conflicts can be avoided.

“Equal” Isn’t Always “Fair”

It’s important to understand that treating children fairly doesn’t always mean treating them equally. Sometimes, fairness means giving different things to different children, especially if only one child is actively contributing to the company’s success.

Instead of dividing company stock or LLC ownership interests equally, many business owners choose to leave the business to the child who is involved. For the other children, assets of similar value—such as life insurance proceeds, real estate, or investment accounts—can be provided.

In some cases, families may choose to keep all children as owners but structure the company to reflect different levels of participation. This can be done by creating different classes of ownership. For instance, children active in the business might receive voting shares, while those not involved receive non-voting shares. This allows profits to be shared, but control of daily operations remains with those who are doing the work. Of course, this type of arrangement works best when the siblings who are not involved in the company on a day-to-day basis allow the others to run the company and not second guess every decision.

Clear Agreements Are Key

Having an unambiguous and up-to-date operating agreement or shareholders’ agreement is also crucial. These documents should clearly state who is in charge, how decisions are made, how profits are distributed, and how ownership interests can be bought or sold.

Many business owners include a buy-sell agreement, which gives the company or the remaining owners the right to purchase the interest of a deceased or departing owner. This helps keep ownership concentrated and prevents unintended co-owners, like in-laws or distant relatives, from becoming involved.

Recent legal changes have made the design of buy-sell agreements even more important. In 2024, the U.S. Supreme Court ruled in Connelly v. United States that life insurance held by a company to fund a buyout is an asset of the company and must be included in the company’s value, which effectively increases the value of the deceased owner’s taxable estate. This means that many buy-sell agreements funded by company-owned life insurance might now create unexpected estate tax obligations. As a result, some businesses are instead using cross-purchase structures, where individual owners—not the business—own the policies, or they are using a separate entity to hold the insurance.

Personal Guarantees

Another important area to address is the personal financial exposure that many business owners have. It’s common for owners to sign personal guarantees on loans, equipment leases, or surety bonds. These obligations do not disappear upon death. A properly designed estate state plan should identify who will take on these guarantees and whether there are enough liquid assets, such as life insurance or cash reserves, to meet these obligations and keep the business operating.

Choosing the Right People to Manage Your Estate

The individuals appointed to manage your estate will play a significant role in how smoothly your plan is carried out. Executors need more than just a basic understanding of probate; they must be able to oversee payroll, communicate with bonding companies, manage bank relationships, and navigate disputes among beneficiaries. In some cases, it can be beneficial to divide these responsibilities, naming one person for operational matters and another for financial or legal oversight.

Open Communication is Vital

Communication during your lifetime is just as important as written documents. Family members should be aware of your wishes. Even if a formal meeting isn’t possible, a letter explaining your intentions can go a long way in preventing future misunderstandings. If you want one child to take over the business, clearly state this. If you want profits shared but decision-making centralized, that should also be documented.

Without a plan, state law will determine how your business is divided, which often means equal shares to all children, regardless of their involvement. For business owners who have built a valuable company and want it to continue, this default approach rarely works.

By working with professionals who understand both the legal and business aspects of succession planning, you can protect what you’ve built, provide for your family, and leave a legacy that avoids litigation.