Estate Planning for Business Owners in New York

A Manhattan restaurant owner came in last spring — profitable business, two kids, no succession plan. He'd spent 22 years building that restaurant and had a will that left everything "equally" to his children. One child worked the business. One lived in Seattle and had no interest in the industry. Without a succession plan, that equal split was a recipe for forced liquidation. We fixed it. But we almost didn't get the chance.

Why Business Owners Face a Different Kind of Estate Planning Problem

Most estate planning focuses on liquid assets — bank accounts, investments, retirement accounts. For business owners, the calculus is fundamentally different. Your business may represent 60%, 70%, even 90% of your net worth. It's not liquid. It can't be split down the middle without destroying its value. And it comes with a set of legal and tax complications that standard estate planning doesn't address.

In New York, where the estate tax kicks in at $7.16 million in 2025 with a brutal cliff provision — estates between 100% and 105% of the exemption pay tax on the full estate, not just the excess — business owners with valuable companies can face enormous tax exposure on an asset they can't easily sell. Planning well before death isn't optional. It's essential.

The three pillars of business estate planning are succession planning, business structure, and integration with your personal estate plan. Each matters independently. Together, they determine whether your business survives you.

Succession Planning: Who Gets the Business and How

Succession planning answers the most basic question: what happens to the business when you're gone? For sole proprietors and small partnerships, the default answer — the business dissolves or goes to probate — is almost always the wrong answer. For businesses worth real money, "figuring it out later" is not a plan. It's a crisis deferred.

Family Succession

Passing the business to a child or family member sounds simple. It rarely is. The complications that arise most often include unequal treatment of children who aren't involved in the business, disagreements about business value, and the reality that the child inheriting the business often can't afford to buy out their siblings — which means the siblings either stay in as passive owners (a formula for conflict) or the business gets sold to fund the buyout.

The cleanest family succession plans address this directly. They use life insurance on the owner's life to fund buyouts of non-business heirs. They establish clear governance structures — operating agreements or shareholder agreements that define who makes decisions. They include provisions for what happens if the inheriting child wants to sell, becomes incapacitated, or divorces a spouse who might claim an interest in the business.

Timing matters too. Transferring business interests during your lifetime — through gifting, sale to a grantor trust, or gradual ownership transfer — can be significantly more tax-efficient than a transfer at death. The federal gift and estate tax exemption is unified, but New York has no gift tax. Gifts of business interests completed during life escape New York's estate tax entirely.

Third-Party Sale

Many business owners plan to sell the business to a third party and leave the sale proceeds to heirs. That's a legitimate strategy, but it requires preparation. A business that can't run without its owner is difficult to sell at full value. Building management depth, documented processes, and a customer base that doesn't depend on your personal relationships all increase the business's salability and value.

If a third-party sale is the plan, the estate plan should accommodate it — holding the business in a revocable trust so it can pass outside probate, ensuring all ownership is properly titled, and planning for the tax consequences of sale proceeds landing in the estate.

Buy-Sell Agreements: The Engine of Ownership Transition

For businesses with two or more owners, a buy-sell agreement is the single most important business succession document. It controls what happens to an owner's interest when they die, become disabled, want to retire, get divorced, or become deadlocked with co-owners. Without one, you're leaving these situations to chance — and to probate court.

Cross-Purchase vs. Entity Redemption

The two standard structures are cross-purchase agreements (surviving owners buy out the departing owner's interest personally) and entity redemption agreements (the business itself buys out the departing owner's interest). Each has different tax implications, particularly for life insurance funding and the survivor's cost basis in the business.

In a cross-purchase arrangement, the surviving owner's cost basis in the acquired interest steps up to the purchase price — which matters enormously when they eventually sell the business. In an entity redemption, the surviving owner's basis doesn't increase. For businesses likely to be sold in the future, cross-purchase structures often provide better long-term tax outcomes, though the insurance funding logistics are more complex.

For businesses with more than two owners, a trusteed cross-purchase arrangement — where a trustee holds life insurance on all owners and manages the buyout — avoids the proliferation of individual insurance policies that a straightforward cross-purchase arrangement requires.

Funding the Buy-Sell

A buy-sell agreement is only as good as the funding mechanism behind it. If an owner dies tonight and the agreement says the surviving owners must buy out the estate, where does the money come from? The three funding options are life insurance (most common for death triggers), disability insurance (for disability triggers), and installment payments (for retirement or voluntary departure triggers).

Life insurance funding requires the policies to be appropriately sized — which means the business must be professionally valued, and the policies must be updated as the business grows. A buy-sell funded with a $500,000 policy on a business now worth $2 million creates a shortfall that leaves either the estate underpaid or the surviving owners scrambling for financing.

Entity Structure and Estate Planning

The legal form of your business — sole proprietorship, partnership, LLC, S-corporation, C-corporation — has significant estate planning implications. Most New York business owners operate as LLCs or S-corporations, and the choice between them matters for what you can do with ownership interests in your estate plan.

LLCs and Valuation Discounts

One of the most powerful estate planning tools available to LLC owners is the valuation discount. When you transfer a minority interest in an LLC to a family member — through a gift or a sale to a trust — the value of that interest for gift and estate tax purposes can be discounted from its pro-rata share of the entity's underlying value. Two factors justify these discounts: lack of marketability (there's no ready market for a minority LLC interest) and lack of control (the minority owner can't force distributions or management decisions).

Combined discounts of 25% to 40% are common in properly documented LLC transfers. On a business worth $5 million, a 30% combined discount means transferring interests valued at $3.5 million for tax purposes — representing real tax savings for estates approaching the New York exemption amount.

To support these discounts, the LLC operating agreement must be drafted to restrict transferability and give the majority meaningful control advantages. The discounts must be supported by a qualified appraisal. And the LLC must be a legitimate business entity — not a shell created solely to claim discounts — which means following formalities, maintaining separate accounts, and conducting real business activity.

S-Corporation Considerations

S-corporations have ownership restrictions that complicate estate planning. Only certain trusts can hold S-corporation stock — qualifying subchapter S trusts (QSSTs), electing small business trusts (ESBTs), and grantor trusts. If a standard revocable trust or irrevocable trust that doesn't qualify receives S-corporation stock, the S-election can be inadvertently terminated — converting the business to a C-corporation and creating immediate, significant tax consequences.

Every S-corporation owner's estate plan must ensure that every trust that might receive stock is drafted to qualify as an S-corporation shareholder. This is a trap that catches estates every year, usually because the business owner had a standard estate plan drafted by a general practice attorney who didn't know to include the QSST or ESBT elections.

Grantor Trusts and Business Interest Transfers

Intentionally Defective Grantor Trusts — IDGTs — are one of the most effective tools for transferring business interests to the next generation at reduced tax cost. Despite the name, they're highly effective planning vehicles.

In an IDGT, the grantor sells business interests to the trust in exchange for a promissory note bearing the IRS-prescribed Applicable Federal Rate (AFR). Because the trust is a "grantor trust" for income tax purposes, the sale isn't treated as a taxable event. The grantor continues to pay income tax on the trust's earnings — effectively making a tax-free gift to the trust beneficiaries while the note is repaid. Any appreciation in the business interests above the AFR passes to the trust beneficiaries free of gift and estate tax.

For a business growing at 8-10% annually while the AFR is 4-5%, the spread between growth and the interest rate represents permanent wealth transfer. Over 10 to 15 years, the compounding effect can be dramatic. This is the kind of planning that requires lead time — you can't implement it in the weeks before death. It requires a living, breathing business owner willing to do the work while values are favorable.

Key-Person Life Insurance

Beyond funding buy-sell agreements, life insurance plays a second critical role in business estate planning: protecting the business itself from the financial disruption that follows the death of a key person. A sole owner or key executive whose death would cause a loss of clients, revenue, or operational capacity is a key person, and the business has an insurable interest in that individual's life.

Key-person coverage provides liquidity to the business during the transition period — to hire replacement talent, service debt, reassure clients, and maintain operations. For a business with a bank line of credit or SBA loan, the lender often requires key-person coverage as a condition of the loan. Even where it's not required, it's often prudent.

Integrating Business and Personal Estate Plans

The business succession plan and the personal estate plan must work together. They typically need to address:

• Ownership titling: Business interests should be titled in a revocable trust so they pass outside probate. If they're in the owner's personal name, they go through Surrogate's Court — potentially a year or more of delay before the successor can act with full authority.
• Powers of attorney: A durable power of attorney should specifically authorize your agent to manage business interests, vote shares, execute operating agreements, and take other business actions during your incapacity.
• Will and trust provisions: The will and revocable trust must specifically address business interests, either directing them to a successor who will operate the business or authorizing the trustee to sell.
• Life insurance coordination: Total life insurance — personal and business — must be reviewed to ensure sufficient liquidity for both personal needs (supporting a surviving spouse, paying estate tax) and business needs (funding buy-sell, covering key-person losses).

For a complete overview of estate planning strategy, see our complete New York estate planning guide. If your estate may approach the New York estate tax threshold, our 2026 New York estate tax guide is essential reading. And for business owners who also own real estate, our real estate investor estate planning guide addresses the intersection of those two complex asset classes.

For additional resources on business succession and New York estate planning, visit Morgan Legal NY's estate planning resource page.

Starting the Conversation

Business owners delay estate planning more than almost any other client group. There's always something more urgent — a deal closing, a staffing crisis, a client emergency. I understand it. But I've also watched the consequences when business owners run out of time.

The restaurant owner I mentioned at the start? We got it done. He now has a trust holding his business interest, a buy-sell agreement with his business partner, a grantor trust receiving gifted minority interests, and a clear succession plan that treats his children fairly without forcing a sale. That took about six months and three meetings. He'd been putting it off for a decade.

Don't wait for the crisis. A well-structured business estate plan typically takes three to six months to implement properly. Start now.