Business Succession and Closely Held Business Planning
Start with the trigger
Succession planning answers what happens on death, disability, divorce, disagreement, departure, and eventual sale. Value the business under a defensible standard (fair market value, minority/marketability adjustments where legitimate) and align the governing documents - buy-sell agreement, operating agreement, shareholder agreement - with the estate plan.
Buy-sell mechanics
Compare entity redemption (corporation or LLC buys the interest) with cross-purchase (other owners buy). Redemption concentrates ownership and gives the entity basis; cross-purchase gives surviving owners basis step-up but requires insurance or funding on each owner. Insurance funding must match the structure - a policy owned by the entity funds a redemption; policies owned by owners fund a cross-purchase. Mismatches are classic exam traps.
Estate tax liquidity tools
IRC §6166 allows deferred payment of estate tax attributable to a closely held business when the interest exceeds 35% of the adjusted gross estate. §303 permits a redemption to pay death taxes and administration expenses under the same 35% threshold, treated as capital gain rather than dividend. ESOPs, GRATs, IDGT sales, and gifting programs move appreciation out of the estate.
Traps
- Funding a cross-purchase with an entity-owned policy.
- Assuming the buy-sell price automatically controls for estate tax without arm's-length terms and formulas.
- Overlooking key-person risk and the need for disability buy-out funding.
- Ignoring GST exposure when interests pass to grandchildren.
Rule of thumb
If the business is more than 35% of the adjusted gross estate, ask about §6166 and §303 in the same breath - that single threshold unlocks both liquidity tools.