31 Mar Your Business Partner Doesn’t Have an Estate Plan . . . and That’s Your Problem

Let me ask you a question that might keep you up tonight: what happens to your business if your partner dies tomorrow?

Not what you hope happens. Not what you assume happens. What actually, legally happens.

Because if your partner doesn’t have an estate plan (or has one that doesn’t account for the business) you could wake up one morning with a new partner you never chose: your partner’s spouse, their children, or a court-appointed executor who has no idea what your business does and no obligation to care.

The Story That Plays Out More Than You’d Think

I worked with a business owner (let’s call him David) who had a 50/50 partnership in a services company doing about $9 million a year. His partner, Mike, had a heart attack on a Saturday morning. By Monday, David was fielding calls from Mike’s wife, who now legally owned 50% of the business.

She didn’t want to run it. She didn’t understand it. But she wanted cash.  immediately. 

It didn’t take her long to hire her own attorney. She demanded a valuation. She wanted David to buy her out at full fair market value, with no seller financing, no transition, no consideration for the fact that David was the one keeping the business alive.

David hadn’t done anything wrong. But he hadn’t done the one thing that would have protected him either: he never made sure his partner’s estate plan and their partnership agreement were aligned.

A Buy-Sell Agreement Isn’t Optional

This is where a buy-sell agreement becomes the most important document in your business.  More important than your operating agreement, your client contracts, or your lease.

A buy-sell agreement answers one question: if something happens to one of us, what happens to the business?

It sets the price (or the method for determining it). It defines the trigger events: death, disability, divorce, retirement, voluntary departure. It specifies the funding mechanism (usually life insurance) so the surviving partner has the cash to buy out the departing partner’s interest without draining the company.

Without one, you’re relying on goodwill, family dynamics, and state default rules . . . none of which are designed to protect your interests.

Your Partner’s Estate Plan Is Your Business

Here’s the part most business owners miss: even if you have a buy-sell agreement, your partner’s estate plan can undermine it.

If your partner’s will leaves “everything” to their spouse, does that include the business interest?  Even though the buy-sell says you have the right to purchase it? If the interest passes through a trust, does the trustee have the authority to honor the buy-sell terms? If your partner’s estate plan creates a conflict between the family’s inheritance expectations and the buy-sell provisions, who wins?

These aren’t hypothetical questions. These are litigation scenarios. And they play out in courtrooms every year, costing families and business partners hundreds of thousands of dollars.  And sometimes the business itself.

What You Should Do Right Now

Have the conversation. Ask your partner if they have an estate plan. Ask if it accounts for their business interest. If this feels awkward, consider what feels worse: the conversation, or arguing with their heirs in the future. 

Review your buy-sell agreement. If you don’t have one, get one. If you do have one, make sure it’s current, funded, and consistent with both partners’ estate plans.

Align the documents. Your buy-sell, your operating agreement, your estate plan, and your partner’s estate plan should all be working together . . . not in conflict.

Fund the buyout. Life insurance is the most common mechanism. If the policies haven’t been reviewed in years, the coverage may no longer match the business’s value.

None of it had to happen. All of it was preventable with documents that didn’t take long to prepare after a few conversations.

I want to be direct about something. The financial exposure here is significant.  We’re often talking about millions of dollars at stake. But the emotional cost may be worse. I’ve watched business partners’ families go to war with each other over valuations, buyout terms, and competing claims to the company. Friendships that spanned decades dissolved in months. Children who grew up together stopped speaking.

The Emotional Cost

If your buy-sell agreement depends on insurance funding, you need to verify (today, not someday) that the policies are active, the coverage is adequate, and the beneficiary designations are correct.

And sometimes the policies have lapsed entirely. Premium payments were missed. The insured partner changed health categories. The coverage expired and no one noticed until it was too late.

There’s another dimension to this problem that catches business owners off guard: life insurance. Most buy-sell agreements are supposed to be funded with life insurance policies. But I’ve seen cases where the policies were purchased twenty years ago (when the business was worth $4 million) and never updated. The business is now worth $16 million. The insurance covers a fraction of the buyout obligation.

The Insurance Gap

The time to solve this problem is while everyone is healthy, rational, and getting along. Once a crisis hits, options narrow, emotions escalate, and the cost of fixing things multiplies.

Is Your Family Protected?

At Garza Business & Estate Law, we work with a select group of wealthy families each year to help them protect what they’ve built: their businesses, their wealth, and their legacy. We are selective in choosing our clientele because the work we do requires focus, depth, and a level of attention that simply isn’t possible when you’re trying to serve everyone.

If what you’ve read here resonates with you . . . 

If you recognize pieces of your own situation in these stories . . . 

Then you may be exactly the kind of family we’re built to help.

Apply to work with us here: https://lgarzalaw.com/schedule-online/