What Happens to Your Family Business If You Don’t Plan for Succession

Family businesses and farms form the backbone of the American economy. Yet behind their stability often lies a hidden vulnerability: the lack of a transition plan. According to PwC’s 2025 Family Business Survey, fewer than one in three family-owned companies have a formal succession strategy in place. When an owner dies or becomes incapacitated without one, the result is rarely orderly. Estate taxes, liquidity shortages, and family disagreements can collide, sometimes forcing the sale of a business that generations worked to build.

In short: what isn’t planned for can quickly unravel.

When Legacy Meets Liability

Without legal and tax planning, family businesses can collapse under their own weight.

If a business owner dies without a clear succession or estate plan, the enterprise becomes part of the estate. That means the IRS steps in to determine its value, often at full market worth, and if the estate exceeds the federal exemption (currently $13.61 million per individual in 2025, scheduled to drop in 2026), up to 40% of the taxable amount may be owed in federal estate tax.

For an illiquid business, that bill can be devastating. Unlike cash or publicly traded stock, farms, equipment, and operating companies can’t be easily sold or divided. Families may have only nine months to pay the tax. Without a plan, they’re often forced to sell assets (or the business itself) just to meet the IRS deadline.

Even heirs who want to keep the business running may face valuation disputes, probate delays, or partner conflicts that drain resources when stability matters most. Failing to plan for liquidity and control transfers can turn an inheritance into a financial and emotional crisis.

The Tools That Keep Businesses in the Family

Fortunately, the tax code and estate planning tools offer options if they’re used proactively. One of the most powerful is IRC Section 6166, which allows estates with a substantial business interest to defer estate tax payments over as many as 15 years, paying in installments with interest. This effectively acts as a payment plan, giving heirs time to generate cash flow or arrange financing rather than liquidating assets.

Valuation planning also matters. Through structures such as family limited partnerships (FLPs) or limited liability companies (LLCs), owners can transfer business interests to heirs at a discounted value that reflects lack of marketability or minority ownership. Under current law, these legitimate valuation discounts can reduce the appraised value of transferred interests, making it possible to pass along more of the business while staying within exemption limits.

Another essential safeguard is the buy-sell agreement. This document sets a clear formula for valuing ownership interests and establishes who can purchase them in the event of death or retirement. Combined with life insurance, often held in an irrevocable life insurance trust (ILIT), it provides ready liquidity to buy out shares or pay estate taxes without touching operating capital.

Together, these tools give families time and flexibility to preserve what matters most: continuity.

The Cost of Waiting

When a family business owner dies without documented succession instructions, several predictable problems emerge:

• Liquidity strain. Estate taxes or creditor claims hit before heirs can access funds.
• Valuation disputes. The IRS or multiple heirs may assign conflicting values to the business.
• Leadership gaps. No clear authority leaves operations in limbo, reducing customer and employee confidence.
• Family division. Without predetermined roles or equalization strategies, inheritance disputes can fracture relationships for good.
  

These aren’t hypothetical scenarios—they happen routinely. A 2024 Private Wealth Insights report found that nearly 60% of family businesses fail to transition successfully to the second generation, often because estate and tax planning were deferred until it was too late.

How to Protect Your Business Before It’s Too Late

Turning intention into protection starts with action.

1. Start early. Begin transition discussions well before retirement or health changes. Early planning allows more tax-efficient transfers.
2. Obtain a professional valuation. Knowing what the business is truly worth—today—helps determine tax exposure and liquidity needs.
3. Build the right entity structure. Family limited partnerships or LLCs can help control how ownership passes while minimizing tax burdens.
4. Create a buy-sell agreement. Define how interests will transfer and how price will be determined.
5. Fund liquidity. Consider life insurance, trusts, or other vehicles to cover estate taxes or balance inheritances.
6. Revisit regularly. Laws and exemptions change. A plan written five years ago may no longer protect your business under new thresholds.
   

Good estate planning isn’t just about wealth—it’s about keeping the family legacy intact. Don’t find yourself unprepared. Contact Bascom Law today for a free consultation.

Conclusion

Without preparation, the business you built to support your family could be the very thing that tears it apart. Estate taxes, liquidity gaps, and legal disputes can dismantle years of work in a matter of months. The good news is that these outcomes are avoidable.

Through careful planning—combining sound tax strategy, clear succession documents, and the right legal structures—you can ensure your business survives not just you, but for generations to come. The legacy you’ve built deserves more than uncertainty. It deserves a plan.

Sources

PwC Family Business Survey 2025

Private Wealth Insights

IRC Section 6166
U.S. Small Business Administration

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