Key Takeaways
- Without an estate plan that connects to your business entity, your family could end up in probate — even if you have an LLC or corporation in place.
- Business succession planning must address two scenarios: your death and your incapacity. Most business owners only think about one.
- Your trust, operating agreement or bylaws, and buy-sell agreement must all align with each other — contradictions between documents lead to litigation.
- There is currently a $15 million federal estate tax exemption per person ($30 million per couple) — a significant planning window that may not last.
- Procrastination is the single biggest mistake business owners make. It is never too early to plan, but it can absolutely be too late.
Introduction
If you own a business in Newport Beach, Huntington Beach, or Irvine, chances are you spend most of your energy growing that business — not planning for what happens if you can’t run it anymore. But that gap in planning can devastate everything you have built.
In this episode of Legacy Protected, estate planning attorney Romelia “DeDe” Soto of The Soto Law Group walks through the essentials of business succession planning in California. DeDe brings years of hands-on experience guiding Southern California business owners through estate planning, probate, trust administration, conservatorship, and business succession — and she pulls no punches about what can go wrong when business owners delay or skip the planning process entirely.
What Most Business Owners Think Succession Planning Means
When DeDe sits down with business owners in Orange County, the first thing she often encounters is surprise — they have never really thought about it. Many say they plan to work in the business until they die. Others assume their family or key employees will simply figure it out when the time comes.
DeDe: That’s when I have to pump the brakes. Do you have the proper documents in place? Are your key employees or family members actually prepared to step in? Maybe you want your kids to take over — but are they even involved in the business right now? Do they want to be? If it’s an electrical company or a service-based business, your children may not be the right people to carry it forward.
Business succession planning, at its core, is making sure that your business entity — whether an LLC, an S corporation, a C corporation, or another structure — is properly connected to your personal estate plan. Those documents have to speak to each other. If they don’t, you can end up in probate.
When There’s No Plan: Two Cautionary Stories
The LLC With No Operating Agreement
DeDe: I had a matter where a husband had set up an LLC in California on his own — no operating agreement. When he died, his wife had no access to the money in the business bank account. You cannot put a beneficiary designation on an LLC. It’s the operating agreement that controls distributions, and that operating agreement has to connect to your estate plan.
Because nothing was in place, we had to open up probate. And because the business was in his separate name, the court determined that the wife received only one-third of the assets — the remaining two-thirds were split among his three children. That was not what this family expected or wanted.
The lesson is straightforward: it does not matter whether your estate is worth $187,500 — the threshold that triggers probate in California — or $187 million. You have to lay the proper foundation.
The Ski Accident That Exposed Everything
DeDe: In another situation, a very successful business owner was involved in a serious ski accident and fell into a coma. He had an S corporation and multiple LLCs, but he was the sole member of each — and he had no estate planning documents in place whatsoever. No durable power of attorney, no healthcare directive, no trust.
His wife had no signing authority. The banks cut off access to the accounts. Employees still needed to be paid. He had major contracts with large corporations, and there was no one legally authorized to manage them. His daughter had been learning the business but was not formally empowered to act.
We had to go to probate court to obtain a conservatorship of both his estate and his person. That is a lengthy, expensive process — and entirely avoidable.
What It Looks Like When Planning Is Done Right
DeDe: Take the same scenario — but imagine the proper documents are in place. There is a revocable trust. The stock or LLC interest is held inside that trust. The operating agreement or corporate bylaws identify a successor. The trust has a clear incapacity clause naming who steps in.
In that case, the daughter — or whoever is named — can go to the bank, present the documents, and have immediate signing authority. Payroll gets processed. Contracts continue. Healthcare decisions get made. And no one has to go to court. The documents handle everything.
The Legal Framework: Documents That Must Work Together
One of DeDe’s core principles is that your documents must speak to each other. Here is what that means in practice:
- Revocable living trust — the controlling document for your estate. It should hold your business interests and clearly define what happens at incapacity and at death.
- Operating agreement (for LLCs) — governs who steps in, how distributions work, and how ownership transfers. It must align with your trust.
- Corporate bylaws (for corporations) — defines leadership succession and share transfer rules. It must not contradict your trust.
- Buy-sell agreement — can separate who receives the business from who receives cash. For example, one child inherits the business operations while a spouse or other children receive a cash equivalent or ongoing revenue stream.
- Durable power of attorney (financial) — authorizes someone to manage finances without court involvement during incapacity.
- Healthcare directive / medical power of attorney — handles personal medical decisions during incapacity.
DeDe: I’ve seen cases go to litigation specifically because the trust and the bylaws contradicted each other on ownership percentages and who would be in control. The trust had been done ten years earlier and never updated when the bylaws were revised. That’s an expensive, time-consuming problem — and it is completely preventable.
Choosing the Right Successor
DeDe: I always start by asking about the stage of life someone is in — not necessarily their age. Is your spouse genuinely involved in the business? Are your children interested in continuing it? Interest matters far more than bloodline. A disinterested successor will let a business decline.
If family members do not want to run the business — and DeDe says this is more common than most owners expect — the conversation shifts to other options:
- A long-tenured key employee who already understands the business
- A staged transition plan, where a partner or successor takes over over five, seven, or ten years
- A sale to an outside buyer, ideally while the owner is still active and can negotiate from a position of strength
- The owner stepping back to a board or consulting role while someone else manages day-to-day operations
For licensed professionals such as dentists, doctors, and chiropractors, the successor may also need to hold the appropriate license — making a co-practice arrangement or structured buyout a common solution.
DeDe: I also think you have to have honest conversations with your family. If your children don’t want the business but want the income from it, you can plan for that — bring in an outside partner, structure a revenue stream for the family, and create a succession plan that serves everyone. That conversation, handled early, prevents litigation later.
Tax Considerations in Business Succession Planning
DeDe is clear that she is not a CPA — and that a qualified accountant should always be part of the planning team. That said, she walks clients through several key tax concepts:
DeDe: Right now, each individual can pass on up to $15 million — $30 million for married couples — without triggering federal estate tax. Above that threshold, the rate is 40 percent. That is a significant window, and business owners with large estates should be taking advantage of it now, because we do not know how long it will last.
One strategy is gifting shares of the business — or real estate held in an LLC — to heirs now, while retaining the income. This moves future growth out of your taxable estate. For estates valued above $30 million, this kind of proactive gifting can make an enormous difference.
Important details:
- Annual gifts up to $19,000 per recipient require no filing.
- Anything above that counts against your lifetime exemption and requires a gift tax return.
- When you pass away, your heirs receive a step-up in basis — meaning if your business started at $100,000 and is worth $10 million at death, the heirs inherit at the $10 million value, reducing their potential capital gains exposure.
- Gifting a fractional or restricted interest in an LLC can qualify for a valuation discount — a $10 million asset with transfer restrictions may be valued at $5 million for gift tax purposes, effectively doubling your gifting capacity.
Business Valuation: Do Not Guess
DeDe: If you are going to gift business interests and claim a valuation discount, you must have a formal appraisal. The IRS requires it. You cannot estimate, and you cannot rely on informal numbers. Get it wrong, and you could find yourself with an unexpected estate tax liability — at 40 percent — at the worst possible time.
Proper valuation also matters for buy-sell agreements, equalizing inheritances among heirs, and income tax planning.
Navigating Family Dynamics
DeDe: Probate litigation is usually about siblings fighting. And if I’m being honest, I think it often traces back to old family dynamics — who got more attention, who got more support growing up. Now we’re talking dollars and cents, and those old feelings resurface.
A common scenario: five children, two of whom have worked in the business for years, and three who chose different paths but still expect an equal share. The two who are grinding out 12-hour days feel that is unfair. The other three feel left out. Both perspectives are understandable — and both can be addressed with the right plan.
DeDe: The goal is equalization, not necessarily equal division. Maybe one child gets the business worth $10 million, and another gets the rental property worth $10 million. The total is the same — the form is different. A neutral professional can walk the family through that kind of plan in a way that reduces tension and avoids conflict.
And for owners who say, “I don’t want to have that conversation — the kids can figure it out when I’m gone” — DeDe’s response is direct: they will probably end up in probate court, litigating for seven to ten years.
The Biggest Mistakes Business Owners Make
DeDe: Procrastination. That is number one. But there are others:
- Assuming children want the business when they have never actually said so
- Relying on verbal promises instead of written, enforceable agreements
- Failing to update documents after major life changes — marriage, divorce, a child having children of their own, a key employee retiring
- Planning only for death and not for incapacity — the far more common scenario
- Letting documents fall out of alignment so that the trust says one thing and the operating agreement says another
When to Start — and How Often to Review
DeDe: Start from the beginning. The moment you form a business entity, you should be laying the succession foundation. It is never too early, but it can absolutely be too late.
After that initial foundation is in place, review your documents at least once a year — in a board meeting, a family meeting, or a formal session with your attorney and advisors. Any major life event or business milestone should also trigger a review: a significant new contract, a large inheritance, a marriage or divorce, a key employee’s departure.
Your First Steps in the Next 90 Days
If you have not yet addressed business succession planning — or if it has been a while since you reviewed your documents — DeDe recommends starting here:
- Read your existing documents. Know what you actually have.
- Identify who would run the business if you became incapacitated — not just who would inherit it at death.
- Confirm that your trust, operating agreement or bylaws, and any buy-sell agreement are aligned with each other and reflect your current wishes.
What to Expect When You Sit Down With an Attorney
DeDe: I want to hear the story of how you built the business — because that tells me a lot about where you want it to go. Then I need to see the documents. Bring everything, even unsigned drafts. Bring your tax returns and any insurance policies. Tell me about your family dynamics and your key employees.
The first meeting is a strategy session. From there, we can look at the full picture — tax exposure, transfer planning, entity structure, incapacity planning — and build a plan that actually protects what you have worked to build.
Everything discussed is protected by attorney-client privilege. And the more you share, the more we can do. If you have a piece of farmland generating $5 million in revenue and you never mention it, that is a gap in the plan. We need to see the whole picture.
It is always a team approach. I work alongside CPAs, financial advisors, and other specialists — because no single professional can address every dimension of a business succession plan alone.
Ready to Protect What You’ve Built?
Business succession planning is not just for large corporations or wealthy families. It is for any business owner in Newport Beach, Huntington Beach, Irvine, or anywhere in Southern California who has worked hard to build something and wants to make sure it survives them — or survives an unexpected illness or accident.
The Soto Law Group is here to help. Attorney DeDe Soto and her team provide personalized guidance on estate planning, probate, trust administration, conservatorship, and business succession planning.
📞 Call us at (949) 945-0059 🗓️ Or schedule a consultation online at thesotolawgroup.com/contact-us-newport-beach-lawyers
Don’t leave your legacy to chance. The right plan, put in place today, protects everything you’ve worked to build.