Your Client Says He Has a Succession Plan. Here's How to Tell If He Does
A client mentions in the March meeting that succession is handled. His son has been in the business six years, there is an agreement from 2016 in a binder somewhere, and he is fairly sure there is a policy attached to it. He says all of this in the tone of a man reporting a solved problem, and then the conversation moves on to the K-1.
Four different situations produce that same sentence. He has thought about it. He has told someone. He has signed something. Or he has an agreement that is current, funded, and consistent with the rest of his estate. Only the fourth one is a plan, and the other three are far more common.
You are not going to settle this by asking him directly, because he will answer the question he thinks you asked. The faster route is the file. Most of what you need is already in it.
What the word usually means
Gallup's survey of 1,264 U.S. business owners, conducted in the fall of 2024 with funding from JPMorganChase and the Kauffman Foundation, found that 55% either plan to close the business or have no plan at all. Among owners with employees, 74% expect to sell, transfer, or take the business public — an intention, not a document.
That distance between intention and instrument is where most of your book sits. It is also why the direct question fails. An owner who has decided his daughter will take over, told his wife, and mentioned it to his attorney once genuinely believes succession is handled. He is not being careless. He has done the hardest part, which is making the decision, and he has no particular reason to know that the decision has not yet been written down in a way that binds anyone.
Seven checks you can run from the file
None of these requires a conversation with the client. Each one can be answered from documents you either hold or can request as part of normal work.
1. Is there an executed agreement, and what is its date? A buy-sell, an operating agreement with transfer provisions, or a shareholder agreement. The date matters more than the contents. The CPA Journal's review of buy/sell agreements puts it plainly: once owners enter into an agreement, it may never be reviewed again, and after a few years the dollar amounts and even the ownership percentages in it may no longer reflect reality.
2. Does the ownership in the agreement match the ownership on the return? Compare the percentages in the document to the current K-1s or the stock ledger. A minority owner admitted in 2021 who does not appear in a 2016 agreement is a structural problem, not a paperwork problem. This check takes two minutes and it fails more often than it should.
3. How is value determined, and when was that last exercised? A mandatory appraisal provision means nothing if no appraisal has been ordered since the agreement was signed. A formula tied to book value quietly excludes goodwill. A fixed stated price was wrong within eighteen months of the day it was written. Any of these still produces a number on a trigger date — it just will not be a number anyone agrees with.
4. What triggers it besides death? Death is the trigger everyone drafts for. Disability, divorce, retirement, and involuntary departure are the ones that show up first in practice, and a triggering event before death carries an income tax cost the parties usually have not modeled, particularly where a long-held interest has appreciated substantially.
5. Is there money behind it, and whose money is it? Whether the obligation is funded — and whether the funding survived the last decade — is a separate question from whether the agreement exists. Corporate-owned policies show up on the balance sheet; individually owned ones frequently do not show up anywhere you can see. Term coverage written in 2016 has a term.
6. Does the plan assume one person stays? If the answer to "who runs it after the transition" is a name that is not the owner's, that exposure belongs on the same page as the ownership transfer. A funded buyout that hands a successor a business whose key relationships walked out the door has solved the ownership question and not the going-concern question.
7. What sits outside the agreement? Operating real estate held personally or in a separate entity, leases between the owner and the business, and loans running in either direction all have to transfer or terminate on the same event the agreement contemplates. An agreement that addresses the equity and says nothing about the building is a partial answer, and the building is frequently the larger number.
Run these and the answer resolves quickly. In most cases the client has a real decision and a partial instrument, which is a better starting position than it sounds like. The decision is the part that is hard to manufacture; the instrument is the part that can be built once someone establishes what is actually there.
Most firms find the boundary in the middle of a client conversation, not before it. The useful version of that conversation happens with no client and no deadline in the room.
A Boundary Conversation is 30 minutes with JT and Luke — no pitch, no client names required — mapping where your firm's advice currently stops.
Where the checks usually fail
Three patterns account for most of what turns up.
The agreement aged and nobody re-opened it. Values moved, an owner was added, a policy lapsed or converted, and the document stayed where it was. The CPA Journal article notes the specific failure mode: insurance levels may no longer be sufficient to fund a buyout, and the agreement typically does not say how the shortfall gets made up. If term coverage has run out, the owner may also no longer be insurable, which removes the cheapest fix from the table.
The structure no longer matches the ownership. A cross-purchase written for two owners requires two policies. Add owners and the count grows quadratically — five owners requires twenty policies, as the same article points out.
Nobody redrafts for that in the moment. The new owner signs a joinder, the existing policies stay where they were, and the funding math silently stops working.
The form was chosen for the wrong decade. Connelly v. United States, decided by the Supreme Court in 2024, held that corporate-owned life insurance proceeds are included in the company's value for estate tax purposes even where the corporation is contractually obligated to use them to redeem the decedent's shares. The additional estate tax in that case ran roughly $900,000. For clients with taxable estates, the redemption-versus-cross-purchase question is now a live one rather than a drafting preference — and converting is not free, since moving policies out of corporate ownership raises transfer-for-value and constructive dividend issues of its own. That question also does not go away in the permanent $15 million exemption era, because an estate can be entirely correct and still short of cash on a nine-month clock.
Worth flagging separately: an estate plan relying on deferred estate tax payments under IRC section 6166 requires the closely held business to comprise at least 35% of the estate. A new or restructured buy-sell can disturb that threshold without anyone intending to.
What to do with the answer
You now know something the client does not, which raises the question of what to do with it, and the answer is a judgment call about your own practice rather than about him.
Some firms carry this work in-house. That means a supervisory and regulatory layer the firm does not currently carry, and more to the point it means hours out of a week that already contains the returns. Some firms refer it out, which is fast and has a predictable failure mode: the client comes back with three opinions from three professionals who never spoke to each other, or does not come back, and the planning relationship reorganizes around whoever ran the forward-looking conversation. And some firms coordinate it, which keeps the work inside a frame you set and the plan coming back to your desk before it reaches the client. That is the same boundary question every closely held file eventually raises, arriving here through succession rather than through tax.
The timing point is the one worth holding onto. If a liquidity event is anywhere in view, the structuring window closes earlier than most owners expect — charitable and estate structuring around a sale has to be in place before the letter of intent, not after.
Seven checks, an afternoon, no awkward conversation required. The alternative is that a trigger event runs the diagnostic instead, and it delivers the results to the family rather than to you.
You do not need to build a new capability to answer this for a client. You need one conversation to see whether coordination does it better than a referral would.
The question isn't whether your clients need this. It's whether they get it from someone who keeps you in the room.
J.T. Hardcastle is a Partner at Sage & Main who helps families and business owners align their wealth with their values through tax-smart planning and intentional generosity.
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