Legacy · 5 min read
Passing a family business on
How families hand a business to the next generation: a written succession plan, a fair value, a funded buy-sell, and life insurance to treat every child fairly.
Passing a family business on
How families hand a business to the next generation: a written succession plan, a fair value, a funded buy-sell, and life insurance to treat every child fairly.
Pillar: Legacy · Reading time: 5 min
In plain words
For many owners the business is most of what they own. It is also the hardest asset to pass on. It can't be split into equal slices like a savings account, it needs someone to run it, and its value depends on that person.
Families who pass a business on well don't leave it to the will alone. They decide early who takes over, what the business is worth, how the transfer will be paid for, and how children who don't join the business still get a fair share.
Step 1: Decide who runs it, and who owns it
Running and owning are two separate questions. One child may run the business while ownership is shared, or one child may own and run it while others receive other assets.
Write the plan down: a successor, a timeline and a training path. If no family member wants the business, a sale to key employees or an outside buyer is still a succession plan.
Step 2: Know what it's worth
You can't divide an estate fairly, buy out a partner, or plan for estate tax without a value. A qualified business appraisal sets a starting number. Many owners update it every two or three years.
Value also drives tax. Under current U.S. federal law, the business counts in your estate at its fair market value. The federal exemption is $15 million per person for 2026, indexed, and some states tax estates at much lower levels.
Step 3: Fund the transfer
There are several common ways to move ownership:
- Gifting shares over time, using the annual gift exclusion ($19,000 per recipient for 2026) or part of your lifetime exemption.
- Selling to the successor on an installment note, so the business's own profits pay for it.
- A buy-sell agreement, a contract that says who buys an owner's shares at death, disability or retirement, and at what price. Life insurance usually funds the death part so the buyer has cash on day one.
- Trusts that hold shares for the next generation.
After the Supreme Court's 2024 decision in Connelly v. United States, how a buy-sell is structured matters more. When the company owns the policies, the payout can raise the company's value for estate tax. Many families now review whether a cross-purchase or another structure fits better.
Step 4: Treat every child fairly
Fair isn't always equal. If one child spends twenty years building the business, giving every child an equal share of it can create conflict, and may put the business in the hands of people who don't run it.
Many families equalize instead. The child in the business receives the business. The other children receive other assets of similar value. When there aren't enough other assets, a life insurance policy, often owned by a trust and sometimes a survivorship policy on both parents, creates them.
Step 5: Protect the business along the way
A business that depends on one person needs protection before the transfer is finished. Key person insurance pays the company if a vital owner or employee dies, to cover lost profits or hire a replacement. Disability cover protects the owner's income and the buy-sell if the owner can't work.
A worked example (illustrative)
Grace, 63, is fictional. She owns a wholesale bakery appraised at $3 million. Her son Owen, 36, has worked there for twelve years and will take over. Her daughters, Ivy and June, have other careers. Grace's other assets total $1 million.
| Child | Receives | Value |
|---|---|---|
| Owen | The business | $3,000,000 |
| Ivy | Half of other assets + half of policy payout | $500,000 + $2,500,000 = $3,000,000 |
| June | Half of other assets + half of policy payout | $500,000 + $2,500,000 = $3,000,000 |
A $5 million policy owned by a trust for Ivy and June closes the gap. An illustrative premium for a healthy 63-year-old might be roughly $60,000 to $80,000 a year, which Grace pays partly from a salary the business funds. Owen also agrees to pay Grace a retirement income from the business, so her lifestyle doesn't depend on selling it.
These numbers are illustrative only. They are not a valuation, a quote or a tax calculation.
Common mistakes
- No written plan. A will alone rarely handles who runs the business, and in what order.
- Splitting the business equally among all children. It can leave the business with owners who don't run it and disagree.
- An old value. A buy-sell price set ten years ago can be far from today's value, and it may not hold up for tax.
- An unfunded buy-sell. A promise to buy shares with no cash behind it can force a sale.
- Ignoring Connelly. Company-owned policies may now add to the taxable value. Review the structure.
FAQs
When should I start succession planning?
Most planners suggest five to ten years before you expect to step back. That leaves time to train a successor, transfer shares gradually and fix gaps.
What if none of my children want the business?
Plan a sale to employees, a partner or an outside buyer. A buy-sell agreement and a current valuation make that sale smoother.
How does life insurance help if my estate is below the federal exemption?
It still creates cash: for fair shares to children outside the business, for state estate taxes, and to fund a buy-sell so the business keeps running.
Who should own the policy?
It depends on the purpose. Policies for equalizing often sit in a trust. Policies funding a buy-sell may be owned by the other owners or the company. Get legal advice on the structure.
Related strategies
- Buy-sell agreements after Connelly (2024) — how the ruling changes funding choices.
- Survivorship (second-to-die) policies — one policy for equalizing at the second death.
- Key person insurance — protecting the business during the handover.
Next step
Take the Wealth Strategy Score at /score to see how your business fits your whole plan. To price buy-sell or equalizing cover, request an illustrative quote at /quote.
Education only, not personal financial, tax, legal or insurance advice. VeraLife.ai is not a registered investment adviser, broker-dealer or insurance agency. All numbers are illustrative.