How to Transfer a Family Business to the Next Generation

Transferring a family business works best when planning starts early. At Sandahl & Damhof, we help owners protect equity and reduce tax exposure before a crisis forces the decision.

Last Updated: June 24, 2026

The family business is often a family’s most valuable asset and one of the hardest to transfer. Without a formal succession plan, estate taxes and liquidity issues can force heirs to sell the business just to settle the bill. The right plan protects the business, the next generation, and the legacy the owner worked to build.

Below is a plain-language breakdown of the strategies our estate planning attorneys use most often with Minnesota business owners.

Why Family Business Succession Planning Is Different

Most estate plans deal with cash, real estate, and investment accounts. A family business adds complexity that standard planning tools do not address.

The business itself is often illiquid. There may not be enough cash in the estate to pay estate taxes without selling company assets or the business outright. Planning in advance is the only real solution.

What Triggers the Estate Tax Problem

When a business owner dies, the full value of their ownership interest is included in their taxable estate. For estates above the federal exemption threshold, the amount over that threshold may be taxed at up to 40%.

The federal estate and gift tax exemption is $15 million per individual ($30 million for married couples using portability) for deaths in 2026, as set by the One Big Beautiful Bill Act (Public Law 119-21). Estates above that threshold face a federal tax rate of up to 40% on the excess. For a business worth several million dollars, that liability can be significant.

Minnesota also imposes its own estate tax with a $3 million exemption — far below the federal threshold. Business owners in the Twin Cities and surrounding metro areas often face both federal and state exposure. An estate planning attorney can help model both liabilities before they become a problem at death.

Options for Transferring a Family Business to the Next Generation

There is no single right structure for passing down a business. The approach depends on the owner’s goals, the business’s value, and the family’s dynamics. Our attorneys at Sandahl & Damhof work through each of these options with clients before recommending a path.

Gifting and Selling Interests to an Intentionally Defective Grantor Trust (IDGT)

An Intentionally Defective Grantor Trust (IDGT) is one of the most tax-efficient tools for shifting a growing business out of a taxable estate. The owner transfers or sells business interests to the trust, and any appreciation after the transfer date may be excluded from the owner’s estate at death.

The “defective” label refers to a specific tax feature, not a flaw. The trust is structured so the grantor pays income tax on trust earnings, which further reduces the taxable estate while benefiting trust beneficiaries.

Family Limited Partnerships and LLCs

Some business owners restructure their ownership into a family limited partnership (FLP) or family limited liability company (LLC). Over time, interests can be gifted or sold to the next generation.

A key advantage is the availability of valuation discounts. Because minority interests in a family entity typically carry restrictions on transfer and control, a qualified appraiser can often assign a discounted value to those interests, reducing the taxable value of transfers to heirs.

• Interests can be transferred gradually over time
• Valuation discounts reduce gift and estate tax exposure
• A formal appraisal is required to support any discount claimed
• The structure must reflect real business purpose, not just tax savings

Using the Marital Deduction to Buy Time

If a surviving spouse is still living when the business owner dies, the unlimited marital deduction can defer federal estate tax until the second spouse’s death. This gives the family time to put a plan in place.

The risk is waiting too long. If no planning is done during the surviving spouse’s lifetime, the full estate including the business may be exposed at their death. Our team regularly works with surviving spouses to structure plans that did not get done before the first death.

What to Do When There Is an Immediate Estate Tax Bill

Even well-planned estates sometimes face unexpected estate tax liability. Two provisions in the federal tax code offer relief for business owners specifically.

Section 6166: Paying Estate Tax in Installments

Under Internal Revenue Code Section 6166, if a qualifying closely held business interest makes up more than 35% of the adjusted gross estate, the executor may elect to pay the estate tax attributable to that interest in installments over time. The statute allows a deferral of up to 5 years on the principal, followed by up to 10 annual installment payments, for a maximum deferral period of 14 years (26 U.S.C. § 6166).

This can prevent a forced sale of the business. The election must be made on a timely-filed estate tax return (Form 706). The IRS retains discretion to require a bond or lien to secure the deferred payments, and strict rules govern when the deferred tax can be accelerated.

Section 6166 can be a helpful tool, but it is a long-term obligation with significant administrative burden. Advance planning is almost always preferable.

Charitable Remainder Trusts (CRTs) for Owners with Charitable Goals

Business owners with charitable inclinations have a powerful option: the Charitable Remainder Trust (CRT). If equity in the business is transferred to a CRT before a sale, the trust can sell those interests without triggering immediate capital gains tax, because the CRT is generally exempt from federal income tax under IRC § 664.

The business owner then receives an income stream from the trust for a set term or lifetime. At the end of the trust term, remaining assets pass to the designated charity or a family-established private foundation.

• Capital gains on the business sale are deferred and spread over distributions
• The owner receives a partial charitable income tax deduction
• Remaining assets pass to a charitable beneficiary at the end of the trust term
• This strategy works best when planned well before any sale or liquidity event

The Most Important Step: Start Planning Now

Succession planning takes time. The strategies above require appraisals, trust drafting, formal elections, and coordination with financial advisors and CPAs. None of them can be implemented after the owner has died.

The attorneys at Sandahl & Damhof bring over 60 years of combined experience to estate planning cases involving business owners. Ryan Damhof has focused his practice on trust planning and closely held business succession — and he is known for explaining complex strategies in plain terms that families can actually act on.

As Linda Boll noted in her Google review: “His ability to explain things in a way that we could understand really put our minds at ease.”

The ultimate disposition of a family business is one of the biggest decisions an owner will make. It deserves careful thought and a trusted legal team that knows what they are doing.

Call Sandahl & Damhof at 612-448-3898 or contact us online to speak with one of our Minnesota estate planning attorneys. We serve clients from our offices in Bloomington and St. Cloud, including Minneapolis, Edina, Richfield, and the greater Twin Cities metro.