How Is a Business Interest Handled in Probate? Are There Ways to Avoid It?

When a business owner passes away, their interest in the business becomes part of their estate and may be subject to probate. This can create complications, especially since the business must often continue operating—potentially without clear leadership—while the probate estate is being administered. Fortunately, with proper pre-planning, much of this uncertainty can be avoided.

(Need a refresher on probate? Check out our Probate Process: A Step-by-Step Guide.)

How Businesses Are Handled in Probate

1. Asset Valuation and Ownership Transfer

If a business is included in the deceased’s estate, the probate court oversees its valuation. This step involves determining the fair market value of the business, a process that can be both time-consuming and costly. Typically, an appraiser is appointed, as valuation is essential for tax purposes and ensuring fair distribution among heirs.

• Sole proprietorships are treated as personal assets and go through probate.
  
  
• Partnerships, LLCs, or corporations are handled based on ownership structure and any existing agreements. For instance, a buy-sell agreement may dictate how a partner’s interest is transferred upon death.
  

2. Impact on Business Operations

Probate can seriously disrupt daily business operations, especially in the absence of a clear succession plan. The court may appoint an executor or administrator to manage the business during this time. However, that person may not have the necessary experience to run the company effectively, potentially reducing its value.

Additionally, probate proceedings are public. This means competitors or creditors may gain access to sensitive business information, posing further risks.

3. Potential Challenges

• Delays: Probate can take several months—or even years—causing uncertainty and operational issues.
  
  
• Disputes Among Heirs: If multiple heirs are entitled to a share of the business, disagreements over its future can arise.
  
  
• Tax Implications: Federal and state estate taxes may apply, which could burden the business if there aren’t enough liquid assets to cover the costs.
  

Ways to Avoid Probate

To ensure a smooth transition of ownership and protect your business from probate-related challenges, consider these estate planning strategies:

1. Establish a Living Trust

Transferring your business into a living trust during your lifetime allows it to bypass probate. The trust's terms will guide how the business is managed or distributed after your death. A living trust ensures privacy, reduces delays, and allows for uninterrupted business operations by naming a successor or including management instructions.

(Read more on the benefits in our post: Living Trusts: Secure Your Legacy and Bypass Probate.)

2. Create a Buy-Sell Agreement

A buy-sell agreement is vital for businesses with multiple owners. This legally binding contract outlines how an owner’s interest is transferred after death. Often, the agreement is funded by life insurance, allowing the remaining owners to buy out the deceased’s share—keeping the business out of probate and running smoothly.

3. Use Business Entities Strategically

Forming your business as an LLC or corporation offers flexibility. You can include provisions in the operating agreement or bylaws that dictate how ownership transfers upon death. This allows for a direct and efficient transition to a designated person or group.

4. Gifting Business Interests

Business owners can reduce their taxable estate by gifting portions of their ownership to heirs during their lifetime. This not only minimizes estate tax exposure but also helps the next generation begin assuming leadership. Be mindful of gift tax rules and whether your heirs are ready to take on the responsibility.

5. Designate Beneficiaries

Certain business-related assets—like bank accounts or life insurance policies—allow you to name beneficiaries. These assets pass directly to the named individuals and avoid probate entirely.

(If you're a business owner, don’t miss our guide: Estate Planning Strategies for Business Owners.)

If you’re a business owner, now is the time to take proactive steps to safeguard your company’s future. Whether it’s establishing a living trust, drafting a buy-sell agreement, or designating transfer-on-death beneficiaries, proper planning ensures your business continues smoothly—without added stress for your loved ones.

✅ Ready to protect your business from probate complications? Book a consultation today and start planning for peace of mind.