Episode 21: April 7, 2026 | Cornered: George Schoenbeck on Closely Held Business Succession Planning

Transcript

00:00:01 you're an attorney?

00:00:02 I have a friend who...

00:00:03 I've been meaning to update my will, but I just bought a new house.

00:00:06 I want to start a business.

00:00:08 My brother was fired.

00:00:09 Hey, my friend got divorced a while back.

00:00:12 I just don't understand how her ex...

00:00:14 You've been there.

00:00:15 At a social function, meeting friends of friends.

00:00:18 Word gets out that you're an attorney and suddenly your night is filled with partygoers asking you quote-unquote simple legal questions.

00:00:25 The questions are seldom in your area.

00:00:27 Some of the stuff you haven't thought about since law school.

00:00:30 You're being cornered out of court.

00:00:33 In the Cornered Out of Court podcast from IICLE, you'll hear from fellow attorneys about the questions they get and the responses they give to escape being cornered.

00:00:45 George Schoenbeck poses some fundamental questions about post-mortem estate planning to readers of his chapter in the IICLE Handbook.

00:00:53 Questions including, how does an attorney know when such planning is needed?

00:00:58 What does the attorney need to know before engaging in it?

00:01:01 And how should the attorney deal with conflicts of interest created by post-mortem planning?

00:01:06 In this episode, Mr.

00:01:08 Schoenbeck answers some additional questions around succession planning for families with closely held businesses as part of their estates.

00:01:16 Such estate planning issues and more will be covered at the 2026 Estate Planning Short Course.

00:01:22 So stay tuned to the end of this episode for more information.

00:01:26 But first, let's hear more about this month's guest.

00:01:30 This is George Schoenbeck.

00:01:31 I'm an estate and trust attorney.

00:01:33 My office is in Orland Park, Illinois.

00:01:36 I'm at Sassen, Arnold, and Schoenbeck.

00:01:39 My firm predominantly handles commercial transactional matters and through that practice serves as outside general counsel for a number of small, mid-sized businesses.

00:01:50 Personally, I handle a lot of estate planning and estate and trust administration for wealthier individuals.

00:01:56 So on account of my practice or my firm's overall practice, I handle many business succession planning engagements as part of my estate planning practice.

00:02:06 I've been licensed in Illinois since 2007 and I've been licensed in Florida since 2022.

00:02:13 With my Florida practice, I have many, many clients who are snowbirds to Florida and who for tax and other reasons would prefer to become Florida residents.

00:02:23 So I do a lot of work situating clients in Florida for residency purposes and then doing some, what I call rear guard planning, ensuring that they're disentangled from

00:02:34 Illinois estate and income taxes as part of that planning.

00:02:38 How do you approach a new business succession engagement?

00:02:43 You know, businesses come in all shapes and sizes and have different cultures.

00:02:48 And, you know, it's there's really there really is no cookie cutter planning when you're talking about business succession planning.

00:02:54 So the first thing I like to do is get to know the clients.

00:02:58 understand the role they currently play in the business, how the business was built or if they acquired it at some point.

00:03:06 I like to know what the business looks like when they are removed from it.

00:03:11 If they were to get hit by a bus tomorrow with the business function, if they have tiers of management under them, what those look like and who the people are and what sort of roles they play in the organization.

00:03:24 And then I'd like to know is

00:03:27 Is family involved?

00:03:28 Do they have adult children working in the business or do they expect to have adult children working in the business?

00:03:33 And how's that going and what sort of challenges are they facing there?

00:03:39 And talking about business succession planning at the highest level, it's really a very simple choice.

00:03:45 You're either going to give the business away or you're going to sell it, or I guess the third option is you'll wind it down and just dissolve it.

00:03:54 But the third option is very simple and straightforward.

00:03:57 There's not much planning to do there.

00:03:59 But if you're going to give it away or you're going to sell it, I'd like to talk with the clients about what are they thinking?

00:04:06 What does that look like?

00:04:08 If they're selling it, to whom are they selling it?

00:04:10 Are they selling it to family members or are they selling it to third parties who are involved in the business and get a better understanding of what they're thinking of?

00:04:20 Oftentimes clients come in a bit

00:04:24 hamstrung because they're thinking about what am I going to do with this business?

00:04:29 And they're really thinking about two things.

00:04:31 They're thinking about what happens if I die tomorrow and how am I going to dispose of this business?

00:04:37 And then the other thing they're thinking about is, well, you know, what's my deliberate plan that if I assume over, you know, I live for a while and I live to see myself dispose of this business, what's that going to look like?

00:04:50 What's the path to that transaction going to look like?

00:04:53 one of the first things we address is there really are, when we're developing a business succession plan, there's really two plans.

00:05:00 It's the first one is, you know, the plan that applies if you die tomorrow.

00:05:05 You know, it's the contingency plan that, so to speak, that's, you know, it's built into your estate plan, but also, you know, may live in shareholder agreements and operating agreements as well, or both.

00:05:17 And then the second plan is the more deliberate one that

00:05:21 where the client says, look, in 10 years, I want to have sold this business to my adult daughter who's involved in the business, and I want to be out of it by then.

00:05:31 So that's the more deliberate one where the client is going to execute it over time and see it through.

00:05:38 Sometimes the clients can get frustrated just trying to, because they're really trying to think about, well, when they're assessing options, they're trying to assess, does this work for if I die tomorrow as well as it works for whatever my deliberate plan is.

00:05:51 So it's, I break those two apart.

00:05:54 In the plan that applies if you die tomorrow, we'll talk about building things into the revocable trust, like purchase options to people who you'd expect to buy.

00:06:04 We'd have seller financing terms where, you know, it's if death is very much unexpected and this business succession plan has to happen,

00:06:12 in a short period of time, maybe mom and dad's trust can finance some of the purchase, for at least for a short period of time to allow the purchasers to get on their feet and buy the interest maybe sooner than otherwise expected.

00:06:27 In the deliberate side of things, oftentimes if it's a sale to a third party, that's more arm's length and negotiations tend to kind of dictate where that goes, right?

00:06:37 Where we spend a lot more time planning is where they have sales to children.

00:06:41 So how are we, are you going to give the children a break?

00:06:44 What sort of tools are you going to use?

00:06:46 Many of my clients will do kind of a dip their toe in the water type of approach, where they'll sell minority interests in a business to the children to start.

00:06:56 And they'll, you know, we'll do a stockholder agreement where the parents keep call options.

00:07:00 And so they can buy the shares back if it doesn't work out the way they hoped it would.

00:07:05 So there's a variety of routes that it can take.

00:07:10 How does the Illinois estate tax factor into what you do?

00:07:15 If the plan is to give it away, you know, when I die, my kids get my company, that's easy because it's just, you know, showing it into the bequest plan.

00:07:24 When some of the children are intended to receive the company and not others, you know, so that's common where

00:07:33 child one and two are work in other industries and are not involved in the business, whereas child three and four are, that's their career is in the business.

00:07:42 we'll look for ways, usually clients want to treat all their children equally.

00:07:47 We'll look for ways to get the business assets to the children involved in the business and other assets to the children who are not involved in the business.

00:07:55 So that, and how to do that comes in a variety of ways.

00:07:59 It depends.

00:08:00 Life insurance can often be helpful to kind of equalize the interests.

00:08:04 Mom and dad die, they collect life insurance and then the life insurance pays.

00:08:09 Children not involved in the business get more cash and the children involved in their business get business interests.

00:08:15 Sometimes when, you know, oftentimes in family businesses, the value of the family business is

00:08:21 far too large of a portion of mom and dad's overall assets for it to be, for us to be able to divide their assets equally among their children.

00:08:30 So in that case, we'll give the children involved in the business an option to purchase.

00:08:37 You know, they'll get their quarter in the form of business interest or they'll get their share, I guess, in the form of business interest, and then they have an option to purchase the rest from mom or dad's trust.

00:08:49 And oftentimes we'll build in seller financing so that for five years, maybe the purchasing child has a low interest rate loan from the trust and has five years essentially to get on his or her feet and be able to refinance that loan with a third party or a regular commercial lender.

00:09:07 That sort of balances the interests of the other children and the one who should buy the business.

00:09:12 So options are popular.

00:09:15 A lot of times where

00:09:17 the tools we use in structuring trust instruments, it's, where a business needs to be retained for, and it's gifted.

00:09:25 Sometimes for various reasons, the parents might want a professional trustee, like a bank or trust company, to serve as trustee.

00:09:34 And if we have that, most banks, pretty much all banks have a very high degree of reluctance to serve as trustee of a trust that holds closely held businesses.

00:09:45 It doesn't work well for the banks.

00:09:46 And frankly,

00:09:47 usually doesn't work so well for the business because in small, closely held businesses, decisions need to be made promptly.

00:09:55 And banks, trust companies manage things by committee where they meet once a month or twice or once biweekly.

00:10:04 So they're not really structured to kind of run closely held businesses either.

00:10:08 So we'll use the investment advisors where we'll have maybe a committee of trusted people who

00:10:17 are knowledgeable of the business and can run it from a very high level, from a board of directors position, and we'll make them investment advisors.

00:10:25 So that pairs off the role of the trustee as it applies to handling the business.

00:10:30 And the professional trustee can manage all the other assets of the parents and handle the other trust administration tasks.

00:10:36 But the business is kind of kept on the side under the purview of the investment advisor.

00:10:42 So that's a useful tool.

00:10:44 We'll use designated representatives for minor beneficiaries, some young adult beneficiaries, and then disabled beneficiaries to ensure that the beneficial interest in the trust, the beneficiaries are well represented and they have adequate voices, I guess, in addressing how these things are handled.

00:11:05 That's important when you have beneficiaries who are minors or just otherwise not yet sophisticated enough.

00:11:13 to handle or to address the disposition of a closely held business.

00:11:17 Aside from options, investment advisors, designated representatives, we always include terms that if the business needs to be retained for a period of time, that there's a waiver of the prudent investor rule so that the trustee has cover for concentrating interest in the business and isn't forced into a fire sale type of situation where they have to get rid of it.

00:11:40 What are the common tools you use to structure wills and trust instruments for those who might be on the die tomorrow plan?

00:11:51 Typically, my clients have estates that are valuable enough that they're taxable in Illinois.

00:11:56 You know, so the Illinois estate tax applies to a decedent to the extent the decedent's gross estate, basically all the decedent's assets, exceeds $4 million.

00:12:09 It's been the law for in Illinois for over 10 years now.

00:12:13 that number, at least that $4 million number, it's not inflation adjusted.

00:12:17 And I think the, especially in the last 10 years with the inflation we've had, $4 million isn't the amount of wealth it was, you know, back when this law was instituted.

00:12:29 So it affects a lot more people.

00:12:31 And it's, you know, as inflation continues to just, you know, raise everybody's overall net worth generally,

00:12:38 it puts more and more pressure on business owning families.

00:12:42 Oftentimes the classic dilemma, that estate tax dilemma that owners of closely held businesses find themselves in is a situation where the family is very wealthy, but a very high percentage of their net worth is concentrated in the family business and the family business is illiquid.

00:12:59 So when the members of a generation die, now there's an estate tax and the family lacks the liquidity

00:13:07 to pay the estate tax.

00:13:09 So with business succession planning, for especially when you're going to sell or give the assets to your children, there's, already issues you have to address with making sure that children are treated equally, making sure that sale terms are fair, you know, addressing all the other considerations there.

00:13:26 But understanding and knowing who's going to pay, how is the Illinois estate tax going to be paid is just one more complicating factor that we have to consider in these types of engagements.

00:13:37 To address the liquidity issue, we will, the easiest issues to have or way to do it is just to have life insurance and put it in an irrevocable trust so that the death benefit doesn't add to the estate tax problem.

00:13:50 And if it's a married couple, there's efficient ways of doing that with second to die life insurance.

00:13:55 It's one policy that insures 2 lives.

00:13:58 So it's the premiums are usually much cheaper because the mortality risk on two people is lower than the mortality risk on one person.

00:14:06 If we have life insurance and it's housed in an irrevocable trust, we can swap assets or borrow funds from the trust to pay the estate tax.

00:14:12 And that's helpful.

00:14:14 But people aren't always insurable.

00:14:16 And that can be a real issue.

00:14:18 So I've had a meeting recently where a client of mine and a sibling of his co-owned businesses and both of them had cancer diagnoses and were told by their insurance agent, we're never going to be able to get either of you insurance.

00:14:31 So, sometimes insurance is just not a, is not a viable option, then you have to think other, other routes.

00:14:38 So, looking to for ways to create the liquidity, and that's where, at that point, sometimes in the business, tax considerations may cause the client to reassess a business succession plan.

00:14:50 A client may have thought, well, I'm going to hold all these assets until death, but maybe to get ahead of the estate tax issue, maybe they consider liquidating some of the assets or

00:15:00 or start to sell the business earlier than otherwise might have been anticipated just to generate some liquidity and be in a better position with respect to the estate tax.

00:15:11 the thing about a state estate tax is, it has a big gaping hole in it and that you can avoid it by moving, out of Illinois.

00:15:18 And unfortunately, that's a lot of my clients do that.

00:15:21 That's why I'm licensed in Florida.

00:15:22 I have many clients who've left Illinois to avoid the estate tax.

00:15:26 They go to Florida because it's more tax favorable jurisdiction.

00:15:30 But it's not just Florida.

00:15:30 I've had clients relocate to Indiana, Michigan, Wisconsin.

00:15:34 You know, it's a state estate tax where there's only 12 states that have an estate tax.

00:15:38 So, you know, people have a lot of options to avoid the Illinois estate tax.

00:15:42 So oftentimes, rather than plan for it and pay it, their plan is, I'm going to move.

00:15:48 Maybe a significant move, you know, down to Florida, or it could be just Northwest Indiana.

00:15:53 The Illinois estate tax is an interesting thing to deal with.

00:15:57 because it is very substantial when it applies.

00:16:00 So once you clip north of that $4 million number, and that $4 million number is not a threshold, it's a trigger, meaning once you're north of $4 million, the Illinois state tax applies to dollar one of your estate, not just dollar 4 million one and up.

00:16:17 You know, you get into a six-figure estate tax by the time you get up to 5 million.

00:16:23 You know, at the time you're around

00:16:25 10 to 12 million, it's roughly a 10% tax.

00:16:28 So you're paying a million plus to the state of Illinois in the state tax.

00:16:32 It applies and it applies in a very real way.

00:16:34 It's not a trivial tax.

00:16:35 There's significant amount that often, you know, can be due if you don't plan for it appropriately.

00:16:41 It's always a good idea to listen to your client, right?

00:16:44 You know, and make sure you understand what your client wants.

00:16:46 But this is an area where, you know, they call us attorneys and counselors.

00:16:50 I often

00:16:51 I think of myself more as a counselor oftentimes because it's planning for the disposition of a significant asset, but usually it's with it involves family in some way, or oftentimes it involves family in some way.

00:17:04 And in those situations, there are all kinds of issues you got to deal with, things that the clients may not feel comfortable talking, discussing.

00:17:12 conflicts among family members that they refuse to acknowledge and other issues with their interpersonal relationships that they refuse to acknowledge.

00:17:23 The more you kind of delve into the people and their personalities and the more you challenge the clients on some of their assumptions and on some of their strategies to deal with their articulated problems,

00:17:37 the better.

00:17:37 You'll often find, you know, that clients come in thinking that they're going to do one thing and after talking through it, they wind up going in a completely different direction.

00:17:46 And so it's the dialogue is important, you know, and listening to the clients and asking, you know, politely challenging them on things that you see a disconnect.

00:17:56 And that's fun.

00:17:57 And it's and ultimately clients very much appreciate it because they know it when they're done because they know

00:18:03 This is a very good plan.

00:18:04 This really makes sense for our family, and it's not what I had in mind when I started.

00:18:09 That's a satisfying thing, and it's an enjoyable part of this type of practice.

00:18:14 Thank you, George.

00:18:15 For more on estate planning, IICLE's premier estate planning conference is May 4th and 5th in Champaign and online via live webcast, and May 18th and 19th in Chicago.

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00:18:36 Go to IICLE.com forward slash EPSC26 for more information.

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