The Liquidity Crisis No One Talks About

When a business owner dies, the family often faces immediate cash needs:

• Living expenses. If you were drawing a salary or distributions, that income stops. Your family still has a mortgage, tuition payments, and everyday bills.

• Estate taxes. If your total estate exceeds the federal exemption ($13.61 million in 2024), estate taxes are due within nine months of death. These taxes are owed in cash, not in business shares. State estate taxes may apply at much lower thresholds.

• Business obligations. Payroll still needs to be met. Vendors still need to be paid. Loan payments don't pause for grief.

• Professional fees. Estate attorneys, accountants, and business valuators all need to be paid—and their fees for business-owner estates can be substantial.

The challenge is that while the estate may be "wealthy" on paper, there may be very little liquid cash available to meet these needs.

What Happens to the Business?

When a business owner dies without a clear succession plan, several things can happen—and most of them destroy value:

• Forced sale under pressure. If the family needs cash quickly, they may have to sell the business at whatever price they can get. Buyers know this and negotiate accordingly. A business worth $8 million under normal circumstances might sell for $4 million in a distressed situation.

• Key employees leave. Without clear leadership, top performers often jump ship. They have their own families to support and can't wait around to see what happens. When key people leave, business value evaporates.

• Customers and vendors get nervous. Uncertainty is bad for business. Customers may take their business elsewhere. Vendors may tighten credit terms. Relationships you spent decades building can unravel in months.

• Family conflict. Without clear instructions, family members may disagree about what to do. Should they sell? Who should run it? How should proceeds be divided? These conflicts can tear families apart while also destroying business value.

• The business simply closes. For some businesses—especially professional practices or those built around the owner's personal relationships—there may be no buyer at all. The business just winds down, and much of its value disappears.

The Valuation Problem

Here's another complexity: when you die, your business must be valued for estate tax purposes. This valuation determines how much estate tax is owed.

Business valuations are as much art as science. The IRS and your estate may have very different views about what the business is worth. Disputes can take years to resolve and cost hundreds of thousands in legal and accounting fees.

Meanwhile, the estate tax is still due—even if the valuation is under dispute. You may need to pay based on an estimated value and then fight for a refund later.

Planning Tools That Actually Work

The good news is that these problems are solvable—if you plan ahead. Here are the key strategies:

1. Life Insurance for Liquidity

Life insurance is the most straightforward solution to the liquidity problem. A death benefit provides immediate cash that can:

• Replace lost income for your family

• Pay estate taxes without forcing a business sale

• Fund a buy-sell agreement (more on this below)

• Provide operating capital while the business transitions

The key is owning the policy correctly. If you own the policy yourself, the death benefit is included in your taxable estate—which can make the estate tax problem worse. Properly structured ownership (often through an irrevocable life insurance trust) can keep the proceeds outside your estate while still providing the liquidity your family needs.

2. Buy-Sell Agreements

If you have business partners or key employees who might take over, a buy-sell agreement creates a predetermined plan for what happens at death. The agreement typically:

• Establishes a price or pricing formula. This removes uncertainty and can help establish value for estate tax purposes.

• Creates a binding commitment. The surviving partners or the company is obligated to buy, and your estate is obligated to sell.

• Provides funding. The agreement is typically funded with life insurance so the buyers have cash when they need it.

Buy-sell agreements can be structured in several ways—cross-purchase, entity purchase, or hybrid approaches—each with different tax and practical implications. The right structure depends on your specific situation.

3. Succession Planning

Who will run the business if you're gone? This question needs to be answered while you're alive and can shape the answer.

• Family successors. If a child or other family member will take over, they need to be developed. That means giving them responsibility, exposing them to key relationships, and gradually transitioning decision-making authority.

• Key employees. If no family member is interested or capable, key employees may be the answer. Consider retention strategies (like phantom equity or stay bonuses) that keep them committed during a transition.

• Outside sale. If the business will be sold at your death, document the key relationships, processes, and institutional knowledge that a buyer will need. A business that can't run without you is worth much less than one that can.

4. Section 6166 Deferral

If your business represents a significant portion of your estate (more than 35% of the adjusted gross estate), you may qualify to pay estate taxes over up to 14 years under IRS Section 6166. This can provide breathing room to generate liquidity from the business rather than forcing an immediate sale.

However, 6166 comes with strings attached: the IRS charges interest on the deferred taxes, and certain events (like selling more than 50% of the business) can trigger immediate payment. It's a useful tool but not a complete solution.

5. Lifetime Gifting and Trust Strategies

Transferring business interests during your lifetime—to family members, trusts, or other structures—can reduce your taxable estate and shift future appreciation out of your estate. Common strategies include:

• Annual exclusion gifts. You can gift up to $18,000 per recipient per year (2024) without using your lifetime exemption.

• Grantor retained annuity trusts (GRATs). These trusts allow you to transfer appreciation to heirs with minimal gift tax cost.

• Family limited partnerships or LLCs. These structures allow you to gift minority interests at discounted values while retaining control.

• Intentionally defective grantor trusts (IDGTs). You can "sell" business interests to these trusts in exchange for a note, freezing the value in your estate while shifting future growth to beneficiaries.

These strategies are complex and require careful coordination between your estate attorney, CPA, and financial advisor. They also take time—starting 5-10 years before a potential exit creates far more options than waiting until the last minute.

The "What If" Conversation

Beyond the technical planning, there's a human dimension that matters enormously: does your family know what to do?

Many business owners keep their plans—or their lack of plans—entirely to themselves. Their spouse doesn't know who the key employees are. Their children don't know where the important documents are kept. No one knows which advisors to call or what the business is actually worth.

Having a clear "what if" conversation with your family—and documenting the answers—can be as valuable as any legal structure. They should know:

Who to call first (attorney, accountant, financial advisor, key employee)

Where to find important documents

Whether the business should be sold, transitioned, or wound down

Who has authority to make decisions in the interim

What the business is approximately worth and how that value might be realized

What We Do

Business succession planning is one of the most complex areas we work in—because it sits at the intersection of investment management, tax planning, estate planning, and family dynamics.

For clients with significant business interests, we:

Assess liquidity needs. We model what your family would need in various scenarios—immediate death, extended disability, planned exit—and identify gaps between needs and available resources.

Coordinate with your team. We work alongside your estate attorney, CPA, and insurance advisor to ensure all the pieces fit together. Often, we identify disconnects between what one advisor has put in place and what another has assumed.

Quantify the risks. What would a forced sale actually cost? What's the estate tax exposure? What happens if the business value drops between your death and the eventual sale? We run the numbers so you can make informed decisions.

Implement solutions. Whether that means structuring life insurance ownership, modeling gifting strategies, or simply ensuring beneficiary designations align with your estate plan, we help execute the plan—not just design it.

If you've built a valuable business and haven't fully addressed what happens if you're suddenly not there, you're not alone. Most business owners are in the same situation. But the families who plan ahead—who take the time to address the liquidity question while there's time to solve it—are the ones who preserve what was built.

We'd be glad to help you think through your situation and identify what, if anything, needs attention.