29 Jun How to Structure an Estate Plan for a Family-Owned Business

Running a successful business takes hard work and dedication, and preserving it for future generations takes some careful planning. Without a solid plan in place, your business could face legal battles, tax liabilities, or even dissolution after your passing or retirement. 

When you own a family business, protecting what you’ve built is one of your top priorities. Here’s how to structure your estate plan so that it safeguards your business and facilitates a smooth transition to the next generation. 

Step 1: Start with a Clear Succession Plan

A well-crafted succession plan will help you prevent family disputes and keep your business running smoothly after you retire. Your succession plan should clearly outline who will take over the business and under what conditions. 

Here are a few questions to consider when formulating your plan:

• Are your heirs interested in running the business after you’re gone?
• Do you want your business to be sold, or will ownership and management stay within the family?
• Who do you plan to name as your successor, and when will the transition happen?

Tip: If multiple children are involved, consider separating management roles from ownership shares to avoid conflicts.

Step 2: Address Family Dynamics 

An estate plan that fails to account for personal relationships can lead to misunderstandings and resentment, and sometimes even litigation. When you have a family business, it’s important to schedule family meetings to communicate your vision, especially if some family members are more involved in the business than others. Make sure your estate plan is transparent, and clearly state who will receive what to prevent conflict.

Step 3: Choose the Right Business Structure

If your family business is currently a sole proprietorship or general partnership, it may be time to restructure your business into an LLC or corporation. These entities offer better liability protection and easier transfer of ownership. For instance, in Arizona an LLC with an operating agreement can define exactly how and when ownership transfers occur. Similarly, restructuring as a corporation can allow you to issue shares to family members, which not only helps with succession planning, but may also offer tax advantages depending on your income structure. 

Step 4: Use a Living Trust to Facilitate a Smooth Transfer

A revocable living trust is one of the most effective ways to transfer ownership of a family business without the delays of probate. A trust acts as a legal entity that can hold and manage business assets for as long as the grantor dictates in the trust document. This also allows for a more private and efficient transition, as trusts are not public record like wills. You can retitle your business interests to fund the trust and leave instructions for your successor trustee, so they can manage or distribute the business assets according to your wishes.  

Step 5: Buy-Sell Agreements Keep Your Business in the Family

If your business has multiple owners—such as you and a sibling or a partner—a buy-sell agreement can dictate what happens to your share in the event of death, disability, or retirement. 

These agreements are legally binding and can:

• Prevent unwanted third parties from gaining control of your business
• Establish a fair valuation method for determining how much your business is worth
• Provide funding (such as life insurance)
• Help maintain financial security for your surviving family members 

Step 6: Plan Ahead for Tax Liabilities

Arizona does not impose a state estate tax, but federal taxes can still apply if your estate exceeds the exemption limit ($13,990,000 in 2025). While that number may seem high, it includes the total value of your estate—real estate, investments, life insurance proceeds, and business interests. 

If your business is a significant portion of your estate’s value, it’s crucial to plan. If you don’t, your heirs may be forced to sell the business just to cover the tax bill. You’ll need to ensure that adequate cash flow and liquid assets are available to cover tax liabilities and other expenses. 

Here are some proven estate planning tools to consider: 

• Irrevocable Life Insurance Trust (ILIT): An ILIT allows you to own a life insurance policy outside of your taxable estate. Upon your death, the proceeds are paid into the trust. This allows your heirs to use the funds to pay estate taxes or keep the business afloat. 
• Gifting Strategies: Use your annual gift tax exclusion (currently $19,000 per recipient in 2025) to transfer your business interests gradually. This strategy allows you to reduce the taxable value of your estate over time. 

Step 7: Keep Your Plan Updated

It’s crucial to review your estate plan on a regular basis, to make sure it’s still serving your needs. You’ll need to make updates any time there are major changes in your life like divorce, death, business growth, or a new family member entering the company. But even if your circumstances don’t change, Arizona laws could. Reviewing your estate plan at least once every three years with a legal professional will ensure that it’s in line with the current state laws. 

Need Help with Estate Planning for Your Family Business?

Owning a thriving family business is a significant accomplishment—but preserving it for future generations takes careful planning. At Phelps LaClair, we assist Arizona business owners in creating estate plans that reflect both their financial goals and family values. 

Whether you’re just getting started with estate planning or need to make some updates to your current plan, now is the time to take action. Contact us today to schedule a free consultation and take the next steps toward preserving your family business for generations to come.

Images used under creative commons license – commercial use (6/29/2025). Photo by Emma Dau on Unsplash