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Most business owners have thought about succession. Fewer have documented it.
Well, they are there and they are serious and they have serious consequences if you don’t do them well… Most of us who own businesses will have some kind of a succession plan. But often what I find, especially in partnerships, is we intend to and we don’t.
“We intend to and we don’t” is the entire problem in six words. The conversation happened. The handshake happened. Nothing got signed, and the company is still the largest thing you own.
Your Operating Agreement Is Not an Estate Plan
The assumption that causes the damage: my business has an LLC operating agreement, or bylaws, or a partnership agreement, so the business is handled.
Those documents govern how the company runs. They say who votes, how profits distribute, what happens if a member wants out, how decisions get made. Some address death; many address it incompletely, and plenty of agreements drafted at formation have never been looked at since.
What they generally do not do is transfer your ownership interest to a specific person when you die. Your membership interest or your shares are your personal property. If nothing moves that interest, it falls into your personal estate — and if your personal estate goes through probate, your ownership stake goes through probate with it.
That is the scenario to avoid. Probate is public, it takes months, and while it runs there is a genuine question about who has authority to act for your interest. Meanwhile the business still has payroll to meet, a line of credit that may have an ownership-change covenant, vendors, and a partner who needs decisions made this week.
The Document That Bridges the Gap
If you want to, in your estate plan, speak to make sure that that happens, then we say, we use a business assignment is what we call it, a supplemental document. That business assignment says that when I die, anything that business had or owned or controlled or future revenue from it because I created it would then be assigned to my estate plan, whether that’s a will or a trust. And those documents would then lay out what’s going to happen to those assets.
A business assignment moves your ownership interest into your trust. Once the trust holds the interest, the trust’s terms control what happens to it, privately, without a court.
Note the breadth of what Renee describes assigning: not only the shares, but what the business owns or controls, and future revenue the business generates from what you created. Royalties, licensing income, earn-outs, receivables — those are often where the value actually sits, and they are easy to leave out of a transfer that only mentions equity.
Get it under the umbrella of your trust or your will, so that your final distributions of whatever that business owned and controlled goes the way you intended for it to go.
One caution worth raising with your attorney rather than assuming: transferring an interest into a trust can require consent under your operating or partnership agreement, and can affect S-corporation eligibility if the trust is not a permitted shareholder. Both are solvable. Neither is something to discover afterward.
One Business or Several
Most people who are business-minded… there’s business owners and there’s entrepreneurs. If you’re a business owner, you typically have one business. You do it for your life, right? You have a medical practice. You have a dental practice. You sell products. You have a store, whatever. Then there are entrepreneurs who have multiple businesses. And so the more complex this gets, the more that it really does require that you build it into your estate plan so that everything… means literally everything.
A single practice has one succession question. Several entities, with different partners, have several — and the right answer is frequently different for each one.
Renee uses her own structure as the example:
I have several businesses, some that I have partners with, some that I just operate solo. And the ones that I have partners with could be different partners. So for instance, I have a real estate business that includes my brother. We own some property together. We both have our own families. We both have our own trust mechanisms and wills or transfer after death documents. So we both have our own wishes for what happens to our joint properties, the LLCs that we are on together… Depending on, again, what you’re trying to do, I might want one business transferred 100% ownership to a partner, no strings attached. They just get everything… I have other businesses that I might say, I want my part of that to come back to my bloodline. I created it with somebody else, but my part of that, I want to go to my bloodline.
Two legitimate, opposite outcomes in the same portfolio. One interest goes to the partner outright — they built it alongside you and your family has no role in it. Another comes back to your children, because your contribution was capital or creation rather than daily operation.
Nothing in a generic estate plan can guess which is which. You have to decide entity by entity and have the documents reflect it.
The Questions to Answer
Whatever your goal is, whatever your end goal for your business, you should speak to that in your estate plan… What is the plan? What is the buyout that you want to happen if you do want somebody to buy out your family or whatever? Or if you want to give your family first right of refusal, do they want to run the business? And if not, then help them through your documents. Think about things like finding a broker to sell the business to, how to liquidate assets.
Work through these specifically:
- Who ends up owning your interest? A partner, your children, a key employee, or whoever buys it.
- If someone buys out your family, at what price and on what terms? A buy-sell agreement with a defined valuation method is what keeps this from becoming a negotiation between your grieving spouse and your surviving partner. Say how the business is valued, how the purchase is funded — often life insurance on each owner — and over what period it is paid.
- Does your family want to run it? Ask them. Do not assume either way. A first right of refusal gives them the option without the obligation.
- If nobody in the family wants it, how does it get sold? This is the instruction most often missing. Name a broker or the kind of broker to engage, identify who knows the business well enough to help, say what you believe it is worth and why, and point to where the financials, contracts, and customer records are kept.
- Who runs it in the meantime? The weeks between your death and any transfer still need someone with authority to sign checks and talk to the bank. Name that person.
Why It Matters More Than the Rest of the Plan
A house sits still while probate runs. A business does not. It loses customers, staff, and value every week nobody has clear authority. A company worth a certain amount on the day you die can be worth substantially less six months later, and the difference comes straight out of what your family receives.
The operating agreement keeps the company running day to day. The business assignment and your trust decide who it belongs to afterward. You need both, and they need to have been read by the same attorney.
This article is for educational purposes only and does not constitute legal, tax, or financial advice. Transferring a business interest to a trust can require consent under your governing agreements and can affect entity tax elections, and the rules vary by entity type and by state. Consult a licensed estate planning attorney, your business attorney, and a certified public accountant together before assigning or transferring any ownership interest.
About the instructor: Renee Parris is an estate planning educator with over 30 years of experience. This article is a companion piece to Renee’s course, Estate Planning, Simplified.
