Estate Planning for California Business Owners: A Tax and Legal Guide
By Yosef Manela
A California business owner's estate plan has three jobs a basic will doesn't handle. It has to move the business to the next owner without probate, keep it running if the owner dies or becomes incapacitated, and deal with the tax side: community property basis, federal estate tax, and rules that apply only to certain entities. The core tools are a revocable living trust that actually holds the business interest, ownership agreements (an operating or shareholder agreement and any buy-sell agreement) that match the plan, and durable powers of attorney that reach the business. California doesn't currently impose an estate tax. Its probate, community property, and property tax rules still shape the decisions.
What happens to a California business if the owner dies without a plan?
If a California owner dies without a will or trust, a business interest held in the owner's own name generally has to go through probate, unless a simplified procedure applies. It passes to the heirs California law chooses, which may not be the people the owner would have chosen.
Who inherits. Under California's intestacy rules, the surviving spouse receives the deceased spouse's half of the community property. The surviving spouse already owns the other half. Separate property is divided differently. The spouse may receive all of it, half, or a third, depending on whether there are children or other close relatives. That means a business that's separate property can end up co-owned by a spouse and children, whether or not that works for the business.
How long and how much. Probate is the court process for transferring a person's property after death. Formal probate typically takes 9 to 18 months, and sometimes longer. California's simplified small-estate process is available only when the counted assets total $208,850 or less (for deaths on or after April 1, 2025). A business interest held in the owner's name and worth more than that generally needs formal probate, unless an exception applies, such as property passing to a surviving spouse.
California sets the ordinary fees of the personal representative (the executor or administrator) and of the estate's attorney as percentages of the estate. Both are computed on the gross value of the property, without subtracting loans against it.
Hypothetical: one asset inventoried at $1,000,000 with a $600,000 loan against it | Ordinary statutory fee |
|---|---|
Personal representative (4% of first $100,000, 3% of next $100,000, 2% of next $800,000) | $23,000 |
Estate's attorney (same schedule) | $23,000 |
Total | $46,000, about 11.5% of the $400,000 of equity |
Hypothetical example; ordinary statutory compensation only.
Who runs the business in the meantime. California also limits how long a personal representative can keep running a decedent's unincorporated business, such as a sole proprietorship. After six months from appointment, continuing requires either a court order or, if the representative has independent administration powers, formal advance notice to interested persons (a "notice of proposed action").
For an LLC, the default rule is even more limited. A deceased member's representative gets a transferee's rights (distributions, but no vote and no role in management), plus information rights for settling the estate. The operating agreement can change those defaults.
Check what the operating agreement says happens when a member dies. If it says nothing, the default rules apply.
Does a living trust keep a business out of probate?
A revocable living trust keeps a business out of probate only if the business interest is actually transferred into the trust. When property is held in a revocable living trust, the successor trustee can take over at death or incapacity without asking the court to get involved. Property held in a living trust also doesn't count toward California's small-estate limit.
Signing a trust doesn't move the business into it. The interest itself has to be transferred to the trustee, through an assignment of the LLC membership interest or a transfer of the corporate shares, and the company's records should reflect the change. Anything left in the owner's own name passes under the will, not the trust. A "pour-over" will can direct those assets into the trust, but property passing under a will is still subject to California's probate rules.
Before assigning the interest, read the operating or shareholder agreement. If it limits transfers or requires consent, follow that procedure. For an LLC, also confirm that the trust will be treated as a full member, not just a transferee with distribution rights.
S corporations need extra care. For income tax purposes, a revocable trust is treated as owned by the person who created it. If the owner is a U.S. citizen or resident, that kind of trust can hold S corporation stock during the owner's lifetime.
After the owner's death, the trust remains an eligible shareholder for only two years. If the stock stays in trust after that, the trust generally has to qualify as one of two kinds of trusts the tax code allows to hold S corporation stock: a qualified subchapter S trust (QSST) or an electing small business trust (ESBT). Each requires its own election. If it doesn't qualify, the corporation can stop being eligible, and its S election can terminate.
If the business is an S corporation, the trust should be written with those rules in mind, and the successor trustee should know the two-year clock starts at death.
How does community property change a business owner's estate plan?
Property a married person acquires during marriage while living in California is generally community property. So a business started during the marriage generally belongs half to each spouse, and at death only the owner's half is theirs to leave.
A business owned before marriage, or received by gift or inheritance, starts as separate property. Whether part of its later growth became community property is a fact-specific question. It's easier to sort out while both spouses can weigh in.
Spouses can agree in writing to divide their community property unevenly, asset by asset, instead of splitting each asset in half. That can matter when only one spouse works in the business. One spouse can take the business while the other takes other assets of equal value.
The tax benefit: basis. Basis is the figure used to measure taxable gain on a sale. Inherited property generally takes a tax basis equal to its fair market value at the date of death. For community property, the surviving spouse's half also gets that new basis, as long as at least half of the community interest was included in the deceased spouse's estate.
Hypothetical: community property business interest, $200,000 basis, worth $2,000,000 at the first spouse's death, sold for $2,000,000 soon after | Federal taxable gain |
|---|---|
Both halves get a new basis (community property rule) | $0 |
Only the deceased spouse's half gets a new basis | $900,000 |
Hypothetical example; federal gain only, assuming the whole interest is community property.
One caution for LLCs taxed as partnerships: the new basis applies to the owner's interest. The LLC's own assets don't get a matching adjustment unless a Section 754 election is in effect (or the partnership has a substantial built-in loss). Check whether the LLC has made that election, or should.
Does California have an estate tax? What about the federal estate tax?
California doesn't currently impose an estate tax. For deaths on or after January 1, 2005, no California estate tax return is required. The federal estate tax still applies to larger estates. For 2026, the basic exclusion amount (what each person can leave or give free of federal estate and gift tax) is $15,000,000 per person.
For married couples, the estate of the first spouse to die can elect to pass that spouse's unused exclusion to the surviving spouse. The election is made on a timely filed federal estate tax return, so the estate has to file to get it.
For lifetime gifts, the annual exclusion for 2026 is $19,000 per recipient. Annual gifts are one way to shift business interests to family over time.
What should a buy-sell agreement do in an estate plan?
For a business with more than one owner, a buy-sell agreement decides who can buy a deceased owner's interest, at what price, and with what money. How it's structured can change the value used for estate tax.
Without one, the family of a deceased LLC member may hold an interest with distribution rights but, by default, no vote and no role in management. The surviving owners, meanwhile, share the company with people they didn't choose.
In Connelly v. United States (2024), the Supreme Court held that a corporation's contractual obligation to redeem a deceased shareholder's shares isn't necessarily a liability that reduces the corporation's value for federal estate tax purposes. In that case, the company owned life insurance on each owner to fund the buyout, and the Court treated the insurance proceeds as a company asset that increased its value. The Court noted the owners could have used a cross-purchase agreement instead, where the owners buy each other's shares and insure each other.
If your company has a redemption agreement (where the company itself buys back a deceased owner's shares) funded with company-owned life insurance, have it reviewed with Connelly in mind.
Does Proposition 19 affect business real estate?
Proposition 19 can affect business real estate. Since February 16, 2021, California's parent-child exclusion from property tax reassessment covers a family home and a family farm. Other business real estate, meaning anything that isn't the family home or a family farm, doesn't fall within that exclusion when it passes from parent to child.
If the real estate is held in an LLC, partnership, or corporation, different rules apply. Transferring interests in the entity generally isn't treated as transferring its real property. There are two important exceptions: when someone gains control of more than 50% of the entity, and when the original co-owners have transferred more than 50% of the interests in total, over one or more transactions.
If the business owns or uses real estate, look at how ownership will shift over time, not just who inherits.
Who runs the business if the owner becomes incapacitated?
If an owner becomes incapacitated, the business is run by whoever the owner's documents name, if those documents exist. A successor trustee can manage trust property during the owner's incapacity without a court conservatorship. For anything outside the trust, a durable power of attorney lets an agent act for the owner. To be durable, it has to state that it isn't affected by later incapacity, or that it takes effect on incapacity.
Then check the business documents themselves. For an LLC, the operating agreement governs how members act and vote. Make sure the company's documents allow the trustee or agent to step in.
What should a business owner gather before an estate planning meeting?
Before an estate planning meeting, gather the documents that show what the owner actually owns and what the ownership agreements already say. The right plan depends on those facts.
Operating agreement, or bylaws and shareholder agreement, with all amendments
Any buy-sell agreement, and the life insurance policies that fund it
Membership records or stock certificates showing how the interest is held, and whether any of it has already been assigned to a trust
The current will, trust, and powers of attorney
Recent business and personal income tax returns, and confirmation of any S corporation election
Deeds for real estate held by the owner or the business
Any premarital or postmarital agreement, and records of when and how the business was started or acquired
A recent business valuation, if there is one
If an interest was never assigned to the trust, or the agreement says nothing about death or incapacity, that's where to start.
Bottom line
A business owner's estate plan works only if the paperwork lines up and stays current.
Review the plan when ownership changes, when a co-owner joins or leaves, after a marriage or divorce, and when the business's value changes significantly. These decisions turn on specific facts, so they're worth working through with an estate planning attorney and a tax advisor.
This article is general information about federal and California tax and legal rules as of October 2026. It is not tax or legal advice for any particular situation, and reading it does not create an attorney-client or accountant-client relationship. Rules change, and the right answer depends on your facts, so talk with a qualified professional before acting.
Yosef Manela is a California CPA and attorney. He is a Certified Specialist in Taxation Law and in Estate Planning, Trust & Probate Law, certified by The State Bar of California Board of Legal Specialization.
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