Business Succession Planning in California: Ownership Transfers, Taxes, and Estate Planning
Quick Answer: Business succession planning in California is the process of arranging how ownership and control of a business will pass to the next owners, during life or at death. It usually combines owner agreements, trusts, and tax planning. California has no estate tax, but federal estate tax, income tax, and property tax reassessment may apply, depending on the specific facts.
For many California families, a business is their most valuable asset and a central part of their identity. Yet ownership transitions are often left unplanned until a death, disability, or dispute forces the issue, leaving uncertainty about who can act, what the business is worth, and how taxes will be paid.
What Is Business Succession Planning?
Business succession planning is a strategy for transferring the ownership and management of a business while keeping it operating. Ownership and management do not always go to the same person. A founder may want all of their children to share in the company’s value while only one child runs it.
A thorough plan typically addresses:
- Who will succeed to ownership, and who will succeed to management
- Whether the transfer will happen during life, at death, or in stages
- How the business will be valued
- How a buyout will be funded if co-owners must purchase a departing owner’s interest
- What happens if an owner becomes incapacitated, divorces, or wants to leave
- How tax exposure can be managed
How Can Ownership of a California Business Be Transferred?
Ownership is generally transferred by lifetime gift, by sale, through a trust, or at death through a will. Each carries different legal and tax consequences, and many plans combine them.
Lifetime Gifts
Gradual gifts of shares or membership interests allow successors to gain experience while the founder remains involved. Larger gifts may require a federal gift tax return, discussed below.
Sales to Family Members, Partners, or Key Employees
A sale can provide retirement income while moving control to a successor, often through installment payments. The seller may owe income tax on any gain.
Revocable Living Trusts
A revocable living trust is a trust the owner controls and can change during life. Holding business interests in the trust can allow a chosen successor trustee to step in upon the owner’s death or incapacity without court involvement. Assets passing only by will generally go through probate, a public, court-supervised process in California with statutory fees (Probate Code sections 10800 and 10810).
Check the Entity’s Governing Documents
Bylaws, shareholder agreements, partnership agreements, and LLC operating agreements often restrict transfers. For California LLCs, someone who receives a transferred interest generally obtains only economic rights and does not automatically become a member with voting rights unless the operating agreement or the other members allow it (Corporations Code section 17705.02).
What Is a Buy-Sell Agreement, and Why Does It Matter?
A buy-sell agreement is a contract among business owners that controls what happens to an owner’s interest after certain events. It typically addresses:
- Triggering events, such as death, disability, retirement, divorce, or an owner’s departure
- Who may or must buy the interest, whether the remaining owners or the company itself
- How the price will be determined, through a formula, a fixed value, or an independent appraisal
- How the purchase will be funded, often with life insurance
Funding structure matters. In Connelly v. United States (2024), the U.S. Supreme Court held that a corporation’s obligation to redeem a deceased owner’s shares did not offset the life insurance proceeds it received to fund the redemption, which increased the shares’ value for federal estate tax purposes. Entity-funded agreements may warrant review.
How Do Estate and Gift Taxes Affect Business Succession in California?
California does not impose its own estate, inheritance, or gift tax, but California residents remain subject to federal estate and gift tax.
The Federal Exemption in 2026
Under the One Big Beautiful Bill Act, enacted in 2025, the federal exemption is $15 million per person for 2026, adjusted for inflation in later years. Value above it is generally taxed at a top rate of 40 percent. The law has no scheduled expiration, though Congress can change it.
Lifetime gifts and transfers at death share this exemption. A separate generation-skipping transfer tax exemption, also $15 million in 2026, applies to transfers to grandchildren and later generations.
Annual Exclusion Gifts
In 2026, an owner may give up to $19,000 per recipient without using the lifetime exemption. Larger gifts generally require a federal gift tax return (Form 709), even if no tax is owed.
Planning for Married Owners
Transfers to a surviving spouse who is a U.S. citizen generally qualify for an unlimited marital deduction. A surviving spouse may also use the deceased spouse’s unused exemption, known as portability, if the election is made on a federal estate tax return. Different rules apply to non-citizen spouses.
Paying the Tax Without Selling the Business
Estate tax is generally due nine months after death. If a closely held business exceeds 35 percent of the adjusted gross estate, the executor may be able to pay the related tax in installments under Internal Revenue Code section 6166, subject to statutory requirements.
What Other Tax Issues Should California Business Owners Consider?
The method of transfer can also affect capital gains tax and California property taxes.
Income Tax Basis
Basis is the value used to calculate taxable gain on a sale. Inherited property generally receives a basis equal to its fair market value at death (Internal Revenue Code section 1014), while gifted property generally keeps the donor’s basis (section 1015). For an appreciated business, this difference can significantly affect the next generation’s tax if it later sells.
In California, community property can generally receive this adjusted basis on both spouses’ halves at the first spouse’s death.
Property Tax Reassessment Under Proposition 19
Under California law, real property is generally reassessed for property tax purposes when there is a “change in ownership.” Proposition 19, effective for transfers on or after February 16, 2021, largely eliminated the parent-child exclusion except for a family home or family farm, so commercial real estate passed to children is generally reassessed.
For real property held by an entity, reassessment can follow a change in control of more than 50 percent of the entity or, in certain cases, cumulative transfers of more than 50 percent of original co-owners’ interests (Revenue and Taxation Code section 64). The structure of the transfer often determines the result.
How Does California Community Property Law Affect a Family Business?
Under California law, property acquired during marriage is generally presumed to be community property (Family Code section 760). A business started during marriage may belong to both spouses even if only one runs it, and a business owned before marriage may acquire a community interest if it grew through either spouse’s efforts during the marriage.
A succession plan should account for the non-owner spouse’s interest, often through spousal consents in buy-sell agreements or a prenuptial or postnuptial agreement.
Treating children fairly does not always mean treating them identically, especially when only some work in the business. A durable power of attorney for financial matters also helps if an owner becomes unable to act.
Frequently Asked Questions
Does California have an estate tax?
No. California does not impose a state estate, inheritance, or gift tax. California residents may still owe federal estate tax if their estate exceeds the federal exemption, which is $15 million per person in 2026.
Do I need a succession plan if my estate is below the federal exemption?
Often, yes. Beyond estate tax, a plan addresses control of the business, co-owner buyouts, probate, incapacity, property tax reassessment, and capital gains exposure.
Will transferring business real estate to my children trigger reassessment?
In many cases, yes. Since Proposition 19 took effect in 2021, transfers of commercial property from parents to children are generally reassessed, although property held in an entity follows different rules.
Speak With a California Estate Planning Attorney
The Law Offices of Omar Gastelum and Associates, founded in 2003 and based in Whittier, California, represents clients in complex and high-stakes matters throughout the state, including business owners coordinating ownership transfers, estate planning, and tax considerations. We serve clients in English and Spanish and offer payment plans.
To discuss your business and your goals, contact The Law Offices of Omar Gastelum and Associates to schedule a consultation.
