Estate and Insurance Planning for Business Owners

Building a successful business is a lifetime achievement – but without planning, that legacy can unravel the day an owner dies or becomes disabled. Business owners typically hold most of their net worth in the company itself, creating concentrated risk. As one business advisor points out, “only about 30% of family businesses transition successfully to the second generation.” In other words, many entrepreneurs watch their hard-won wealth slip away within one generation. To avoid that fate, owners must address liquidity, taxes, succession and asset protection before tragedy strikes.

• Concentrated wealth and illiquidity. An owner’s business may be their single largest asset. Because closely-held shares or partnership interests are illiquid, heirs often lack ready cash to pay estate taxes or buyouts. Without planning, the estate might have to sell the business or other assets under duress.

• Estate tax exposure. Large estates can incur hefty federal (and state) death taxes. Concentrating wealth in one asset means a family can easily “bust” through the exemption, triggering taxes on every dollar above the exemption.

• Succession risk. Many small companies depend on the owner for day-to-day leadership. If the owner suddenly dies or is disabled, operations and decision-making can grind to a halt without a clear handoff plan.

• Family dynamics and asset protection. Business ownership can strain family relations. One common pitfall is assuming that children or spouses will want and can run the company – often an incorrect assumption. Worse, without restrictions an heir’s divorcing spouse or creditor could claim a share of the business, dragging co-owners “in bed” with an unwanted partner.

  
  

These challenges mean that every business owner – not just the ultra-wealthy – needs a custom estate plan. As one advisor noted, “Estate planning is not reserved for the ultra-wealthy; it’s essential for anyone who wants to protect what they’ve built.” In short, planning is the difference between passing on a thriving enterprise and creating a court-supervised liquidation.

Federal and State Tax Considerations

A major reason to plan is to minimize taxes. On the federal level, only very large estates incur estate tax. For 2025, the federal estate tax exemption (the amount an individual can pass tax-free) is $13.99 million. (Married couples effectively get double: $27.98M.) Thanks to recent legislation (the “One Big Beautiful Bill” of 2025), that $13.99M threshold is now permanent, and will rise to $15 million per person in 2026. Any estate over these amounts pays up to a 40% tax on the excess (the IRS runs a sliding scale for amounts just above the exemption). Importantly, lifetime gifts above the annual exclusion ($19,000 in 2025) will reduce your remaining exemption, so business owners often use annual gifting strategies early on. An experienced planner will calculate the owner’s lifetime gift use to preserve the maximum estate exemption for the time of death.

Even with a multi-million-dollar exemption, high-net-worth owners must get creative. For example, generation-skipping tax rules limit transfers to grandchildren unless special planning is done. Tools like Spousal Lifetime Access Trusts (SLATs) and Intentionally Defective Grantor Trusts (IDGTs) can move future business gains out of the taxable estate while still providing for family. Business owners may also use discount planning (valuing shares at less than their face value when the right conditions exist) and installment sale trusts to shrink the taxable estate.

State tax rules can be even more punishing. Twelve states and DC have their own estate (or inheritance) taxes, often with much lower exemptions than the federal government. For example, New York’s estate tax exemption is only $7.16 million for 2025 – well below the federal amount – and if the estate value exceeds 105% of that cap, a “cliff” can accelerate the tax to the full value. Massachusetts’s exemption is a mere $2 million, and Washington State’s is $3 million. Even if a family lives in a state without an estate tax (like Texas or Florida), owning property or business interests in a taxing state can trigger that state’s tax rules. (For instance, a vacation home in Connecticut or an LLC holding real estate in Oregon can create unexpected tax bills.)

Actionable insight: owners should inventory where their assets are located and consult state tax thresholds. In practice, this often means funding state estate taxes through insurance or cash reserves so heirs aren’t forced to sell assets. The Business Owner’s Guide to Estate Planning and Life Insurance Strategies. Life insurance proceeds or liquid savings earmarked for tax can be life-savers (literally) for the surviving family.

Essential Estate Planning Tools

Regardless of size, every business owner needs a core set of documents that cover personal and business assets together. Here are the most important:

• Revocable living trust (and will). A revocable trust is often the foundation. Unlike a will, assets in a living trust avoid probate (the public court process) and transfer privately and immediately at death. The trust’s successor trustee can take over the business and other assets without delay if the owner dies or is incapacitated. This ensures continuity: as one attorney put it, a revocable trust “allows business interests and other assets to transfer privately and efficiently,” letting your trustee step in “immediately if you’re unable to manage your affairs.” The owner retains full control during life and can amend the trust terms as circumstances change. (Heirs can still receive an inheritance plan under the trust, but the key is avoiding court red tape.)

• Durable Power of Attorney (POA). A broad financial POA authorizes someone you trust (often a spouse or co-owner) to run the business if you become disabled. A well-drafted POA can explicitly allow that person to vote shares, execute contracts, manage bank accounts and payroll, and negotiate with suppliers or customers on your behalf. Without a POA, a disabled owner’s family might have to seek a court guardianship just to access business bank accounts or sign routine documents – a delay that could cripple operations.

• Healthcare/Disability documents. While not about the business per se, medical power of attorney and living wills ensure your personal and business decisions keep moving if you can’t speak for yourself.

• Buy-Sell Agreement. If there are multiple owners or key partners, a buy-sell agreement (often funded with life insurance) is critical. This is a contract that says, for example, “if Partner A dies or leaves, the remaining partners will buy out A’s shares at a preset price.” It removes uncertainty: valuation formulas (or fixed prices set in advance) and mandatory buyout terms ensure that ownership changes hands smoothly. Importantly, many buy-sells rely on life insurance policies on each owner: when one dies, the policy payout gives the surviving owner the cash needed to purchase the deceased owner’s interest.

• Irrevocable Life Insurance Trust (ILIT). An ILIT is a special trust that owns a life insurance policy on the owner’s life. Because the trust (not the owner) is the policy owner and beneficiary, the death benefit escapes the taxable estate. The ILIT then pays estate taxes or buys out partners on behalf of the heirs. In effect, the business funds the trust (via premiums paid by the owner or even by the company), and the trust provides the cash when needed. The result: immediate liquidity for tax or buyout without adding to your estate tax bill.

• Other Trusts for High-Value Assets. Extremely wealthy owners often layer additional trusts. For instance, a BDIT (Beneficiary Defective Irrevocable Trust) lets an owner shift future growth out of the estate while still maintaining control over the business. A SLAT (Spousal Lifetime Access Trust) can move assets to a spouse while still giving the family indirect use of them. A carefully structured Intentionally Defective Grantor Trust (IDGT) or Grantor-Retained Annuity Trust (GRAT) can transfer large business interests to heirs with minimal gift tax. These are advanced tools – often used by high-net-worth owners to freeze the value of a growing company for tax purposes – and they require expert legal help.

Tip: Every document must be coordinated. Your buy-sell formulas should match your valuation methods in the trust, and beneficiary designations (e.g. on life policies or retirement accounts) must match the goals in your will or trust. It’s also important to name appropriate fiduciaries (trustees and executors) who understand the business. Some owners appoint a business trustee (an outside advisor or co-owner) to manage the company part of the estate plan while a general trustee handles personal assets. This split trusteeship avoids conflicts between running the firm and fiduciary duty to heirs.

Succession and Continuity Planning

Estate planning for business owners goes hand-in-hand with succession planning. This is the blueprint for who will actually run or own the company after you’re gone. For an LLC or closely held C-Corp, this often means formalizing an operating agreement or shareholder agreement that spells out the transfer of ownership. Many small businesses ignore this, leaving defaults to state law. As one advisor warns, “if ownership transfers aren’t defined, state default statutes decide what happens – and that may not align with your intent.” The smart solution is to build your wishes into the business documents. 

For example, modern statutes (like in Florida) even allow LLCs to contain inheritance designations that override wills or standard trust rules, ensuring the right heirs get control. An essential component is funding the transition. Suppose you and a partner each own 50% of a business and haven’t saved cash on the side. If you die, your 50% passes to your family – but your partner may not be able to afford buying that interest from the estate. This could force the sale of the business or dilution of shares. A life-insurance-funded buy-sell removes that problem: when you pass, your partner gets the insurance payout to buy your share, and your family gets a cash payment (instead of an illiquid business interest). Key-person (or key-man) insurance is another layer of protection. If one person’s skills are critical to the company, a policy on that owner provides a cash cushion in the event of death or disability.

The company owns the policy and uses the death benefit to hire interim management, pay debts, or support the family while the business stabilizes. As one firm notes, keeping key-person insurance in place “provides liquidity, allowing surviving partners or family members to continue business operations without financial hardship.” Real-World Example (Middle-Income Owner): Consider Maria, sole owner of a local manufacturing shop valued at $2 million. Maria is married with two college-age kids. She sets up a revocable trust naming her husband and a trusted manager as co-trustees of the business. She funds a small term life insurance policy ($500,000) in an ILIT to cover funeral costs and minor debts (keeping it outside her estate).

Maria and her husband execute a durable POA naming each other as agents. They create a simple buy-sell agreement – in this case a “cross-purchase” funded by the insurance – so that if one spouse dies, the other uses the policy proceeds to buy out the decedent’s 50% of the business from the estate, keeping the company under family control. This relatively modest setup prevents probate, provides for the surviving spouse’s income, and keeps the kids’ inheritance tidy and tax-free (since the estate is below the $13.99M federal threshold and the spouses can each use the exemption by portability). Real-World Example (High-Net-Worth Founder): Now consider Alex, founder of a tech company worth $50 million and living in New York. Alex’s estate easily exceeds the New York exemption ($7.16M for 2025) and the federal cap, so he uses advanced planning. He funds a leveraged life insurance trust (ILIT) with a large policy (e.g. $15M benefit) that will pay federal and state estate taxes so his children won’t have to liquidate assets.

He forms a SLAT to move $15M (and growing) to his wife’s benefit, capturing current gift exemptions. A BDIT holds his remaining company stock: it purchases appreciated shares from Alex, who continues to run the business as trustee. This removes future growth from Alex’s estate. He also maintains a buy-sell agreement with his co-founders: each owns a policy on the others. If Alex dies, his co-founders immediately have the funds to buy his shares, and Alex’s heirs get a cash payout (again, avoiding forced sales). This complex web of trusts, life insurance, and agreements is how ultra-wealthy owners keep a family business in the family and minimize a seven-figure tax bill. In both examples, the key is coordination.

The legal documents (trusts, agreements, insurance policies) must all point in the same direction. Even middle-income owners benefit hugely from a well-funded buy-sell and a living trust. As one planner put it, “Don’t look at [planning] as a sad thing… it’s a happy thing, because you’re taking care of your family and your business on your terms.”

Insurance Strategies for Protection and Liquidity

Life insurance plays a starring role in these plans. Properly structured policies can create liquidity “out of thin air” for an illiquid enterprise. Besides the buy-sell funding and key-person coverages already mentioned, consider these techniques:

• Income Replacement for Survivor: If a business owner dies, the family often loses the owner’s salary or draws. Without a plan, the surviving spouse might see household income collapse. To prevent hardship, many owners earmark life insurance for income replacement. For example, a term policy purchased by the business can be paid in a lump sum or annuity to the spouse each year. Some companies also establish deferred compensation or pension plans for the owner that continue for the survivor.

• Creditor and Lawsuit Protection: Some insurance and trust vehicles shelter assets. For instance, an ILIT’s proceeds (once paid) go to beneficiaries shielded from creditors. A BDIT not only transfers business value out of the estate, it can protect that value from business claims. Business liability insurance and personal umbrella policies (while beyond estate planning) also protect personal assets that might otherwise be gobbled up in a lawsuit. Together, these insurance strategies form a financial firewall around the family’s wealth.

• Charitable Giving and Split-Dollar: Owners interested in philanthropy can use insurance in creative ways. Split-dollar arrangements or charitable trusts funded by insurance let an owner give to charity and provide for heirs, leveraging tax deductions. (For example, an Irrevocable Life Insurance Trust might make the premiums and policy donations, shrinking the taxable estate while funding a charity after the owner’s death.)

Key Takeaways for Business Owners

Estate and insurance planning is not optional for business owners who care about their legacy. Here are practical steps every owner should consider:

1. Inventory and value your business. Determine what your company is worth and where your exposure is (federal and state taxes, key dependencies, etc.).

2. Set up essential documents. Create or update your living trust, will, and POA to include business assets. Use an ILIT for large life policies. Draft or revise a buy-sell agreement [Internal Link: Buy-Sell Agreement Services] for all owners. Work with an attorney to cover both business and personal sides.

3. Fund for liquidity. Ensure there is cash or insurance available to pay estate taxes and buyouts. Even a modest life insurance policy in trust can save your heirs from selling assets at the worst time.

4. Coordinate ownership transfer. Define exactly who will take over the business or buy family members out. Consider unequal distributions if one heir is active in the business (and compensate others with other assets). Update corporate documents so your plan overrides default laws.

5. Stay on top of tax law. Laws and exemption levels change. The federal estate tax exemption will rise to $15M in 2026, but even that may not prevent state taxes. Regularly review thresholds (for 2025: $13.99M federally, $7.16M in NY, $3.0M in WA, etc.). [Internal Link: Trust & Estate Taxation Blog]

6. Consult experts and communicate. Work with an estate planning attorney and tax advisor experienced in business succession. Make sure family and partners understand the plan. Update your plan after major events (a new child, sale of part of the business, death of a spouse, etc.).

Estate and insurance planning for business owners is undeniably complex – involving trusts, buy-sells, life insurance structures, and tax rules at both the federal and state level. But the alternative is leaving your company and family to chance. By acting now, owners preserve their life’s work for the next generation. Brister Law Firm’s attorneys have deep experience guiding entrepreneurs through this process. We help craft personalized solutions (from revocable trusts to irrevocable life insurance trusts, buy-sell agreements, and more) so that your business continues smoothly and your family receives the full benefit of what you’ve built. Contact Brister Law Firm today to start securing your business legacy – because good planning today means peace of mind tomorrow.