Estate Planning for Michigan Business Owners

For business owners, estate planning involves more than deciding how personal assets will pass to loved ones. It also requires a clear plan for a company that may represent a significant portion of the owner’s financial life, support employees, and depend on the owner’s leadership.

Without a documented business succession plan, an owner’s death, incapacity, or retirement can create uncertainty during an already difficult transition. Who will manage the business? Who will inherit or purchase the ownership interest? How will the interest be valued? Do the company’s governing documents and the owner’s estate plan reflect the same intentions?

Addressing these questions in advance can provide greater direction for family members, co-owners, employees, and future business leaders.

Hamilton Law helps business owners in Kalamazoo, Battle Creek, and throughout Michigan coordinate their estate planning and business succession goals. A thoughtful plan can help protect both the company and the people who depend on it.

Choose a Successor for the Business

An important part of business succession planning is deciding who should lead the company when an owner retires, dies, becomes incapacitated, or otherwise steps away.

The appropriate successor depends on the business and the owner’s long-term goals. A family member may be prepared to assume responsibility, a trusted employee may be the strongest leadership choice, or an outside buyer or manager may make more sense.

Choosing a successor is only the beginning. Business owners should also consider:

• Whether the successor has the necessary experience

• What training or preparation may be needed

• When the transition should begin

• Which responsibilities should be transferred

• Whether the successor will also receive an ownership interest

• How employees, clients, and vendors will be informed

Advance planning can help the company continue operating with less disruption. It also gives the people connected to the business an opportunity to understand the owner’s expectations before a transition becomes necessary.

Plan for Management During Incapacity

Succession planning should address more than death or retirement. An accident, illness, or other unexpected event may leave a business owner temporarily or permanently unable to manage the company.

The estate plan and business documents should identify who has authority to make decisions during the owner’s incapacity. Depending on the company’s structure, this may involve a durable power of attorney, trust, operating agreement, corporate resolution, or another governing document.

Without clear authority, family members and business partners may disagree about who can access accounts, sign contracts, manage employees, or continue daily operations.

Planning for incapacity can help prevent delays and keep the company functioning during an emergency.

Create a Plan for Transferring Business Ownership

Leadership and ownership often overlap, but they do not have to pass to the same person. A comprehensive estate and succession plan should separately address what will happen to the owner’s interest in the company.

Depending on the owner’s objectives, a business interest may be:

• Sold to a co-owner, employee, or outside buyer

• Transferred to a family member

• Distributed through a will or trust

• Redeemed by the company

• Transferred gradually during the owner’s lifetime

Each option can involve different legal, financial, and tax considerations. The company’s operating agreement, shareholder agreement, partnership agreement, or other governing documents may also restrict how an ownership interest can be transferred.

A business owner’s estate-planning documents and company agreements should work together. Conflicting provisions can create uncertainty about which person receives the interest and whether that person is permitted to become an owner.

Review the Company’s Buy-Sell Agreement

A buy-sell agreement establishes how an owner’s interest may be transferred following certain events, such as death, disability, retirement, termination of employment, or another departure from the business.

The agreement may address:

• Who can purchase the departing owner’s interest

• Whether a purchase is required or optional

• How the ownership interest will be valued

• When and how the purchase price will be paid

• Which events trigger a potential transfer

• Whether life insurance will fund the purchase

Even if a company already has a buy-sell agreement, it should be reviewed periodically. Changes in ownership, business value, family circumstances, insurance coverage, or tax law may affect whether the agreement still works as intended.

A buy-sell agreement should not be placed in a file and forgotten. It must remain consistent with the company’s current ownership structure and the owners’ estate-planning goals.

How Connelly v. United States Affects Some Buy-Sell Agreements

In 2024, the United States Supreme Court issued an important decision concerning the estate-tax valuation of a closely held company with a life-insurance-funded stock redemption agreement.

In Connelly v. United States, the company owned life insurance on its shareholders. After one shareholder died, the company received the insurance proceeds and used a portion of them to redeem the deceased shareholder’s stock.

The Supreme Court held that, when valuing the deceased owner’s shares for federal estate-tax purposes, the company’s obligation to redeem those shares was not a liability that offset the life insurance proceeds. As a result, the insurance proceeds increased the company’s fair market value and, consequently, the value of the deceased owner’s shares.

The decision does not mean every life-insurance-funded buy-sell agreement is ineffective. However, it highlights the need to review company-owned life insurance and redemption arrangements carefully.

A plan created before Connelly may not produce the estate-tax result the owners originally expected.

Redemption Agreements and Cross-Purchase Agreements

Business owners should understand the difference between redemption and cross-purchase agreements when evaluating how an ownership transfer will be funded.

Redemption Agreements

Under a redemption agreement, the company purchases the departing or deceased owner’s interest. When life insurance funds the purchase, the company generally owns the policies, pays the premiums, and receives the proceeds.

This structure may be easier to administer when several owners are involved because the business holds the insurance policies. However, Connelly demonstrates that company-owned life insurance may affect the company’s valuation for federal estate-tax purposes.

Cross-Purchase Agreements

Under a cross-purchase agreement, the remaining owners purchase the departing or deceased owner’s interest. The owners may hold life insurance policies on one another to fund the purchase.

Because the insurance proceeds are generally received by the individual purchasing owners rather than the company, the proceeds may not increase the company’s value in the same manner addressed in Connelly.

A cross-purchase arrangement is not necessarily the right solution for every company. If a business has several owners, the number of required insurance policies and the administrative responsibilities can become complicated. Premium costs may also vary significantly when owners have different ages or health conditions.

The appropriate structure depends on the company’s ownership, value, number of owners, available funding, and long-term goals.

Understand Buy-Sell Insurance and Key Person Insurance

Life insurance may serve more than one purpose in a business succession plan. Buy-sell insurance and key person insurance both provide funds following a death, but they address different business needs.

Buy-Sell Insurance

Buy-sell insurance is intended to provide funds for purchasing a deceased owner’s interest. It helps the surviving owners or company complete the ownership transfer required by the buy-sell agreement.

Key Person Insurance

Key person insurance is intended to help the company manage the financial effects of losing an owner or employee who is essential to its operations.

The proceeds may help the business:

• Replace lost revenue

• Recruit and train a replacement

• Pay ongoing expenses

• Satisfy certain financial obligations

• Maintain stability during the transition

Because these policies serve different purposes, a comprehensive succession plan may include both. The ownership, beneficiaries, coverage amounts, and intended use of each policy should be clearly documented.

Determine How the Business Will Be Valued

A succession plan should establish a practical method for determining the value of an ownership interest. An outdated or unclear valuation provision can lead to disagreements among family members, co-owners, and potential buyers.

A buy-sell agreement may use:

• A fixed value updated periodically

• A formula based on revenue, earnings, or another financial measure

• An independent business appraisal

• A process involving multiple appraisers

• Another agreed valuation method

Whatever method is selected should be reviewed regularly. A valuation established years ago may no longer reflect the company’s actual financial condition, assets, debts, intellectual property, customer relationships, or growth.

Life insurance coverage should also be reviewed against the company’s current value. If the coverage has not kept pace with the business, it may not provide enough money to complete the intended purchase.

Coordinate the Business Plan With the Estate Plan

A business should be treated as part of the owner’s overall estate plan rather than as a separate issue. Decisions involving ownership, succession, valuation, insurance, and taxes can directly affect the owner’s family and the assets ultimately included in the estate.

The following documents and arrangements may need to be coordinated:

• Wills and trusts

• Powers of attorney

• Buy-sell agreements

• Operating or shareholder agreements

• Partnership agreements

• Life insurance policies

• Beneficiary designations

• Employment agreements

• Business valuation provisions

For example, a will may leave a business interest to a family member while the company’s operating agreement requires that interest to be sold to the remaining owners. Reviewing the documents together can help identify and resolve inconsistencies before they create a dispute.

Business owners should also work with their attorney, accountant, financial advisor, and insurance professional when tax planning, valuation, and insurance considerations overlap.

Review Your Business Succession Plan Regularly

Estate planning for business owners is not a one-time task. A plan should be reviewed as the company and the owner’s circumstances change.

A review may be appropriate after:

• Adding or losing a co-owner

• A significant change in the company’s value

• A marriage, divorce, birth, or death

• Naming a new successor

• Expanding into a new market

• Changing the company’s legal structure

• Purchasing or replacing life insurance

• A major change in tax or business law

• The retirement or disability of an owner

Regular reviews can help ensure that the succession plan still reflects the owner’s goals and remains workable for the business.

Frequently Asked Questions About Estate Planning for Business Owners

Why do business owners need a separate succession plan?

A traditional estate plan may explain who inherits an owner’s assets, but it may not provide the detailed instructions needed to manage, value, fund, or transfer a business interest. A succession plan addresses the company’s leadership, ownership, and continued operation.

Can a business interest pass through a will or trust?

A business interest may pass through a will or trust, but the transfer remains subject to the company’s governing documents and any applicable buy-sell agreement. These documents should be reviewed together to prevent conflicting instructions.

What happens to a business if the owner becomes incapacitated?

The result depends on the company’s governing documents and the owner’s estate plan. Without proper planning, family members or co-owners may be uncertain about who can manage operations, access accounts, or make important decisions.

What is the purpose of a buy-sell agreement?

A buy-sell agreement establishes what happens to an ownership interest after certain triggering events. It may identify the buyer, establish a valuation method, set payment terms, and explain how the transaction will be funded.

Does the Connelly decision apply to every business with life insurance?

No. The decision specifically addressed the valuation of a closely held company involved in a company-owned, life-insurance-funded stock redemption. However, owners with similar arrangements should have their plans reviewed to determine whether the decision may affect them.

Is a cross-purchase agreement better than a redemption agreement?

Not necessarily. Each structure has benefits and potential complications. The appropriate choice depends on the number of owners, insurance costs, administrative needs, tax considerations, and the company’s overall succession goals.

How often should a business succession plan be reviewed?

A business succession plan should be reviewed periodically and whenever there is a significant change involving the company, its value, its ownership, the intended successor, the owner’s family, or applicable law.

Can Hamilton Law help coordinate my business and estate plans?

Hamilton Law assists Michigan entrepreneurs and business owners with estate planning, business succession, buy-sell agreements, and related business documents. Our team can review how these arrangements work together and help identify whether updates may be needed.

Speak With a Michigan Estate Planning Attorney

A business may represent years of work, financial investment, and personal commitment. A carefully coordinated estate and succession plan can help protect that work while providing clearer direction for family members, co-owners, employees, and future leaders.

Hamilton Law helps business owners in Kalamazoo, Battle Creek, and throughout Southwest Michigan connect their business succession decisions with their broader estate-planning goals.

To discuss your estate plan, buy-sell agreement, or business succession strategy, contact Hamilton Law at (269) 488-8394. Our team can help you evaluate your current arrangements and develop a plan tailored to your company and family.