What the term means, the five decisions it has to settle, and the California and federal rules that decide whether the company survives the transfer.
Estate Planning for a Family Business is the work of deciding, in writing and in advance, who will own a privately held business after the owner dies or becomes incapacitated, who will run it, how the transfer will be paid for, and how the family members who do not receive the business will be treated.
It is estate planning and business succession handled as a single plan, because the two documents control the same asset. Your living trust says who inherits your interest in the company. Your operating agreement, bylaws, or shareholder agreement says whether that transfer is even permitted, and what the person who receives it is allowed to do. When those two documents disagree, the business is the thing that breaks, usually at the worst possible moment.
The distinction matters because an ordinary estate plan is built around assets that behave themselves while the paperwork catches up. A house does not need a decision on Monday morning. A brokerage account does not have employees, a payroll run, a landlord, a bonding company, a line of credit with a personal guarantee, or a supplier who will stop shipping the week your name leaves the account. An operating business needs all of those decisions immediately, and the estate documents alone do not make them.
So a real plan answers a wider set of questions than a will and a trust can answer on their own, and it answers them for two different events: death, and the more common one, incapacity. A stroke or a serious diagnosis takes the owner out of the business without transferring a single share. If nobody has authority to sign, the company can be solvent and profitable and still unable to function.
Every family business plan resolves these five, explicitly. A plan that resolves four of them has left the hardest one to be argued about later, by people who are grieving.
Who ends up holding the equity, in what percentages, and through which vehicle: outright, in trust, voting or nonvoting.
Who manages, who signs, who is on the bank account, and who has authority the day the owner is unavailable rather than the month the trust is settled.
Where the cash comes from for taxes, for a buyout, and for the months when the business is running without the person who built it.
How the child who works in the business and the child who does not are each treated, and whether the answer is equal, or equitable, or both.
The fifth decision runs underneath the other four: valuation. Nearly every mechanism in this area, from a buyout price to an estate tax return to a gift of minority interests, depends on a defensible number. Families who leave the number to be determined later are usually deciding, without knowing it, that a court or the Internal Revenue Service will determine it for them.
California is not a neutral backdrop for this work. Four of its rules routinely decide how much of the company survives the transfer.
Probate is expensive here, and it is charged on gross value. California Probate Code sections 10800 and 10810 set statutory compensation for the personal representative and for the estate's attorney as a percentage of the estate accounted for: 4 percent of the first $100,000, 3 percent of the next $100,000, 2 percent of the next $800,000, 1 percent of the next $9 million, and 0.5 percent of the next $15 million. On a $3 million estate that is $43,000, and both the representative and the attorney may each be entitled to that amount. The figure is calculated on gross value, so debt against the building does not reduce it. A business kept outside a trust is a business whose value is being used to calculate a fee.
An operating business inside a probate is a business under supervision. Probate Code section 9760 governs when a personal representative may continue running a decedent's unincorporated business, and generally requires court authorization. Court authorization is not a schedule that a contractor, a restaurant, or a medical practice can operate on.
Proposition 19 changed the property tax answer for commercial real estate. Since February 2021 the parent to child exclusion from reassessment applies to a family home the child moves into as a principal residence, subject to a value limit, and to family farms. The old exclusion for other real property, including the building the business operates out of and any rental property, is gone. Children who inherit the company's real estate directly can face a reassessment at current market value, and the new tax bill lands on the operating company as rent or as carrying cost. Read our summary of Proposition 19 and California property tax.
Real property held in an entity follows different rules. Reassessment of California real property owned by a legal entity turns on change in ownership or change in control of the entity under Revenue and Taxation Code section 64, broadly when more than 50 percent of the entity is transferred to one person or entity, or when cumulative transfers by the original co-owners exceed 50 percent. That is a different question from a parent to child transfer of the deed, and it is one reason the way title is held deserves attention long before anyone dies. Entity level changes also carry their own filing obligations with the Board of Equalization.
California is a community property state. A business built during a marriage with community funds or community effort is frequently community property in whole or in part, even when only one spouse's name is on it. Where a separate property business grew during the marriage because of a spouse's labor, California courts apportion the growth between separate and community property under the approaches from Pereira and Van Camp. Characterization is not a formality. It determines what the owner is actually free to give away.
California imposes no state estate tax. The federal estate and gift tax exemption is high by historical standards, and rises to $15 million per person in 2026, as we cover in our note on the 2026 exemption. Most family businesses in the Conejo Valley will not owe federal estate tax. Two things follow from that, and they point in opposite directions.
The first is that for most families the pressing risk is not tax, it is administration: a company nobody has authority to run, a buyout with no funding, and a probate fee calculated on the whole enterprise. The second is that for the families who are over the line, the tax is due roughly nine months after death in cash, and a closely held business is the least liquid asset a person can own. Internal Revenue Code section 6166 can allow the estate tax attributable to a closely held business interest to be deferred, generally where that interest exceeds 35 percent of the adjusted gross estate, with interest only payments followed by installments. It is a real tool, and it is conditional, which is exactly why it should be evaluated while the owner is alive rather than discovered by an executor.
The buy-sell agreement deserves a fresh reading. In Connelly v. United States, decided by the United States Supreme Court in 2024, a corporation held life insurance to fund the redemption of a deceased brother's shares. The Court held unanimously that the insurance proceeds were a corporate asset that increased the company's fair market value for estate tax purposes, and that the obligation to redeem the shares did not offset that value. Many entity redemption arrangements written before that decision were built on the opposite assumption. Cross purchase structures, insurance LLCs, and revised valuation clauses are all responses worth considering, and the right one depends on how many owners there are and how old they are.
A price in an agreement is not automatically the price for tax purposes. Internal Revenue Code section 2703 generally disregards a restriction or an option for valuation purposes unless it is a bona fide business arrangement, is not a device to pass value to family for less than full consideration, and has terms comparable to those in an arm's length agreement. A formula written in 1998 and never revisited fails that test on its own terms.
Discounts for lack of control and lack of marketability can reduce the value of a minority interest, and are a routine part of planning gifts of nonvoting interests. They are also routinely examined. They require an appraisal, and they require the underlying documents to actually create the limitations being claimed.
This is the most common defect we see, and it is invisible until the transfer is attempted.
The interest was never assigned. A trust that names the business is not a trust that owns the business. The membership interest or the stock has to be assigned to the trustee, the transfer has to be recorded on the company's books, and the operating agreement or bylaws often require written consent from the other owners before it is effective. A trust with an empty schedule is the single most frequent cause of a probate the family thought they had avoided.
Inheriting an interest is not the same as inheriting a seat. Under California's Revised Uniform Limited Liability Company Act, a person who receives a membership interest by transfer is generally a transferee entitled to distributions, and does not acquire management rights unless the operating agreement provides otherwise or the other members admit them. A surviving spouse can end up with the economics of the company and no vote in it. That is sometimes the intended result. It should never be an accident.
S corporations have an eligibility problem that a general trust form will not catch. Only certain trusts may hold S corporation stock. Grantor trusts qualify while the grantor is living and for a limited period after death, and beyond that the stock generally must be held by a qualified subchapter S trust or an electing small business trust, each of which requires an affirmative election and each of which carries its own conditions, including that a qualified subchapter S trust have a single income beneficiary. If the stock lands in a trust that does not qualify and no election is made in time, the S election can terminate and the company's tax treatment changes for everyone in it. If you are still deciding on structure, see our comparison of the LLC and the S corporation in California.
Incapacity has no document. A durable power of attorney for finances is often written for personal assets and says nothing usable about running a company. The parallel authority inside the business, a successor manager, an officer with signing authority, or an amendment allowing a named person to act, has to exist in the entity documents. Read our note on planning for incapacity.
Personal guarantees outlive the guarantor's involvement. Owners routinely guarantee leases, equipment financing, and credit lines. The estate can remain exposed to those obligations while the business itself has passed to one child. Identifying the guarantees is unglamorous and it changes how the rest of the plan has to be built. See also protecting personal assets from business liability.
This is the part that has nothing to do with statutes and everything to do with whether the family is still speaking in five years. Dividing a company equally between a child who runs it and three siblings who do not is a decision to make the operator answerable to owners who bear none of the risk and take none of the calls. Giving it entirely to the operator, with no offset, is a decision the other children will read as a verdict on their worth.
The usual approaches are not exotic. Non-business assets, particularly real estate and retirement accounts, can be directed to the children who are not in the business. Life insurance can equalize where the other assets do not stretch. Voting interests can go to the operator while nonvoting interests go to the others, so economics and control are separated deliberately rather than accidentally. A buyout funded by a promissory note over a defined term can move ownership without draining the company on day one. Each of these has a cost. The point of the plan is to choose the cost knowingly, and to say so out loud while the owner is alive to explain the reasoning.
What Estate Planning for a Family Business is not: it is not a will on its own, it is not a buy-sell agreement on its own, and it is not a single act. The company's value changes, the family changes, the tax rules change, and a plan written around a business half its current size is a plan that no longer describes the thing it governs.
If you can answer all eight from memory, your plan is in unusually good order. If you cannot answer two of them, those two are where the risk is concentrated, and they are usually fixable in a single sitting.
This page is general information about California and federal law, not legal advice, and it does not create an attorney-client relationship. The rules described here change, and how they apply depends on your own documents, your entity type, and how title is held. Speak with Donald W. Flaig before acting on anything here.
Bring your operating agreement and your trust to the same table. We will tell you where they disagree, and what it would take to fix it.
