Business Succession Planning
Summary
- A business succession plan has to settle two separate questions: who will own the business and who will run it. The tax planning follows from those answers, not the other way round.
- In the United States, the transfer of a closely held business is planned around the estate and gift tax exemption of $15,000,000 per person in 2026, valuation discounts, buy-sell agreements and, where the estate tax cannot be avoided, the payment of that tax in installments over up to fourteen years after its due date (IRC § 6166).
- In Germany, business property can be exempt from inheritance and gift tax at 85 or 100 percent (§§ 13a, 13b ErbStG), but only if the business is located in Germany or elsewhere in the European Union or the European Economic Area, the holding requirements are met and the payroll is maintained for five or seven years. A direct holding in an American company does not qualify.
- The two countries value the same business by different methods. The difference affects the tax in each country and the credit one country grants for the tax of the other.
- The transfer of German company shares to an heir or donee who is not resident in Germany can trigger German exit tax on the unrealized gain (§ 6 AStG). This is the most frequently overlooked cost in German-American family businesses.
- A sale to family members or third parties is taxed differently from a gift or an inheritance. Basis step-up at death in the United States, the preferential rates on business sales in Germany and the income tax treaty’s residence rule decide which route costs least.
Part I. What a succession plan has to settle
Many family businesses change hands only once in a generation, and often under pressure: after a death, an illness or a dispute. A plan made in advance separates the questions of ownership and management. Ownership can pass to all children equally, while management passes only to those who work in the business, or to outside managers. Voting and non-voting shares, a board with independent members, a shareholders’ agreement and a family charter give that separation a legal form.
The plan also has to answer how the children who do not take over the business are treated fairly, how the owner’s income is secured after the transfer, when a sale to outside parties would be preferable to a family succession, and where the cash for estate tax, compulsory shares and buy-outs will come from. In a German-American family the plan has to be consistent under both legal systems: an American estate plan that ignores the German compulsory share (Pflichtteil, § 2303 BGB), or German articles of association that ignore an heir’s American residence, can undo the result.
Part II. Closely held businesses in the United States
Entity form. The form of the business determines what can be transferred and to whom. Interests in a limited liability company or a limited partnership can be divided into managing and non-managing interests and transferred gradually. An S corporation offers a single level of tax, but its shareholders are restricted: a nonresident alien may not hold shares, and trusts may hold them only as grantor trusts, qualified subchapter S trusts or electing small business trusts (IRC § 1361(b), (c), (d), (e)). An inheritance by a child who lives abroad, or a transfer to a trust that does not qualify, terminates the election. In an international family that is a reason to plan the heirs’ residence into the shareholders’ agreement or to reconsider the entity form in time.
Buy-sell agreements. A buy-sell agreement fixes who may or must buy a departing owner’s interest and at what price. For estate tax purposes, the agreed price is disregarded unless the agreement is a bona fide business arrangement, is not a device to transfer the business to family members for less than full value, and has terms comparable to those of arm’s-length arrangements (IRC § 2703(b)). Where the company buys back the shares with life insurance proceeds, the Supreme Court has held that the proceeds increase the value of the company and are not offset by the redemption obligation (Connelly v. United States, 602 U.S. 257 (2024)). Many older agreements need to be reviewed in light of that decision.
Transfer techniques. The common techniques combine an early transfer, while values are low, with the owner’s continued control or income.
| Technique | How it works | Key rule |
|---|---|---|
| Annual exclusion gifts | Non-voting interests given each year to children and grandchildren | $19,000 per recipient in 2026 (IRC § 2503(b)) |
| Recapitalization | Voting and non-voting shares; the owner keeps the votes and transfers non-voting shares | Transferred shares must be non-voting to avoid inclusion (IRC § 2036(b)); classes differing only in voting rights are outside IRC § 2701 |
| Grantor retained annuity trust | Owner receives an annuity; growth above the federal rate passes free of gift tax | IRC § 2702; owner must survive the term |
| Sale to a grantor trust | Business interest sold for a note to a trust whose income is taxed to the owner | No gain on the sale (Rev. Rul. 85-13); growth outside the estate |
| Family limited partnership or LLC | Assets pooled; minority interests transferred | Inclusion risk if the owner keeps control or benefit (IRC § 2036) |
| Installment payment of estate tax | Interest only for five years, then up to ten annual installments of the tax on the business interest | Business must exceed 35 percent of the adjusted gross estate; 2 percent interest on the tax attributable to the first $1,940,000 of taxable value in 2026 (IRC § 6166) |
| Special use valuation | Farm or business real property valued at its actual use | Reduction limited to $1,460,000 in 2026 (IRC § 2032A) |
The installment payment and the special use valuation are available only to the estates of United States citizens and residents. The estate of a nonresident owner of an American business pays the estate tax on the full value within nine months, against an exemption of only $60,000, unless an estate tax treaty applies. The situation of nonresident owners is described on the page on nonresidents with U.S. assets. Maryland imposes both an estate tax and an inheritance tax, and the District of Columbia an estate tax, with exemptions far below the federal amount; the page on gift and death-related taxes summarizes them.
Part III. Closely held business interests in Germany
Civil law. German succession law gives children and the spouse a compulsory share of half of their intestate share, payable in cash (§§ 2303, 2317 BGB). If the business passes to one child, the others can demand payment immediately, which can force a sale. A notarized waiver of the compulsory share (Pflichtteilsverzicht, §§ 2346, 2348 BGB), combined with a compensation agreement, is the usual answer. The articles of association have to fit the estate plan: a partnership agreement decides by its succession clause who can become a partner on a death, and the articles of a GmbH can provide for the redemption of shares that pass to an heir outside the intended group (Einziehung, § 34 GmbHG).
Inheritance and gift tax relief. German tax applies if the owner or the recipient is resident in Germany. If neither is, Germany still taxes German business property and shareholdings of at least 10 percent in a German corporation (§ 2(1) no. 3 ErbStG, § 121 BewG). In all of these cases, qualifying business property can be exempt under §§ 13a and 13b ErbStG.
| Standard relief | Optional full relief | |
|---|---|---|
| Exempt portion | 85 percent, plus a deduction of up to €150,000 on the rest | 100 percent |
| Holding period | 5 years | 7 years |
| Minimum payroll (more than 15 employees) | 400 percent of the base payroll over 5 years | 700 percent over 7 years |
| Administrative assets (Verwaltungsvermögen) | No relief if 90 percent or more of the business property | Not more than 20 percent |
| Shares in a corporation | More than 25 percent, alone or through a pooling agreement; seat or management in Germany, the European Union or the European Economic Area | |
| Acquisitions above €26 million | Relief reduced step by step (§ 13c ErbStG) or granted only after a needs test on the recipient’s other assets (§ 28a ErbStG) | |
Family companies whose articles restrict withdrawals, transfers and severance payments can receive an additional deduction of up to 30 percent of the value before the relief is applied (§ 13a(9) ErbStG). Recipients in tax classes II and III are taxed at class I rates on qualifying business property (§ 19a ErbStG).
A direct holding in an American corporation or LLC is not qualifying business property, because the company has its seat outside the European Union and the European Economic Area. An American subsidiary held through a qualifying German company is assessed as part of that company’s assets, with its administrative assets counted in the consolidated computation (§ 13b(9) ErbStG). For a German family with American operations, the holding structure therefore decides whether the relief is available.
Exit tax on transfers to heirs abroad. A person who has been fully taxable in Germany for at least seven of the last twelve years and holds at least 1 percent of a corporation is taxed on the unrealized gain in the shares not only on moving abroad, but also when the shares are given or bequeathed to a person who is not fully taxable in Germany (§ 6(1) AStG in the version applicable since 2022). The gift of GmbH shares to a child living in the United States, or the inheritance of such shares by that child, therefore triggers German income tax on the built-in gain in addition to any inheritance or gift tax. On application the tax can be paid in seven annual installments, usually against security. The charge can often be avoided or reduced by the choice of recipient, by a German holding structure or by the timing of the transfer, but only if the plan is made before the transfer.
Part IV. Business valuation
Both countries tax the fair market value, but they measure it differently.
| United States | Germany | |
|---|---|---|
| Standard | Fair market value: the price between a willing buyer and a willing seller (Treas. Reg. §§ 20.2031-1(b), 25.2512-1) | Gemeiner Wert (§ 9 BewG); derived from sales in the last year, otherwise from an earnings valuation (§ 11(2) BewG) |
| Method | Appraisal considering earnings, assets and comparables (Rev. Rul. 59-60) | Recognized business valuation or the simplified earnings method, with a capitalization factor of 13.75 (§§ 199 to 203 BewG) |
| Minimum value | None | Net asset value at liquidation values (§ 11(2) sentence 3 BewG) |
| Discounts | Lack of control and lack of marketability, often 20 to 40 percent combined; restrictions disregarded under IRC §§ 2703 and 2704 | Generally not allowed; the family company deduction of up to 30 percent is the statutory substitute |
| Documentation | Qualified appraisal; adequate disclosure on Form 709 starts the three-year limitation period (Treas. Reg. § 301.6501(c)-1(f)) | Separate value assessment by the tax office for business property (§ 151 BewG) |
Where both countries tax the same transfer, each values the business by its own method, and the credit for the foreign tax is limited to the tax attributable to the property in the crediting country. A German value higher than the American value can therefore leave part of the German tax uncredited in the United States, and the reverse. A valuation prepared with both methods in mind, before the transfer, avoids most of these mismatches.
Part V. Taxation of the transfer proceeds
A business can pass by gift, by inheritance or by sale, and the income tax on the proceeds or on the later sale by the successor depends on the route chosen.
| Route | United States | Germany |
|---|---|---|
| Inheritance | Basis stepped up to value at death (IRC § 1014); a later sale by the heir is taxed only on post-death appreciation | No step-up; the heir takes over the decedent’s historical cost; exit tax if the heir is not resident in Germany (§ 6 AStG) |
| Gift | Donee takes the donor’s basis (IRC § 1015) | Donee takes the donor’s historical cost; exit tax if the donee is not resident in Germany |
| Sale of shares by the owner | Long-term capital gain at up to 20 percent, plus 3.8 percent net investment income tax, which does not reach an S corporation or partnership interest in a business in which the owner materially participates (IRC §§ 1(h), 1411(c)(4)); state tax, in California up to 13.3 percent | Shareholding of at least 1 percent: 60 percent of the gain taxable at the personal rate (§§ 17, 3 no. 40 EStG); smaller holdings: 25 percent flat tax plus solidarity surcharge |
| Sale of a whole business or partnership interest | Gain allocated asset by asset; depreciation recapture taxed as ordinary income | Once in a lifetime after age 55: allowance of €45,000, phased out above €136,000, and a reduced rate of 56 percent of the average rate (§§ 16(4), 34(3) EStG) |
| Installment sale | Gain recognized as payments are received (IRC § 453) | Transfer against lifelong support payments treated as a gratuitous transfer; payments deductible by the successor and taxable to the transferor (§§ 10(1a) no. 2, 22 no. 1a EStG) |
| Qualified small business stock | Stock issued after July 4, 2025: 50, 75 or 100 percent of the gain excluded after three, four or five years, up to $15,000,000 per issuer or ten times basis, if greater (IRC § 1202) | No equivalent |
Under the income tax treaty between the United States and Germany, a gain from the sale of shares is generally taxable only in the seller’s country of residence, with exceptions for real property and for companies whose value consists mainly of real property (Art. 13). A United States citizen resident in Germany remains taxable in the United States on the same gain under the saving clause, with a credit for the German tax. For the American owner, the step-up at death often makes holding the business until death, and selling afterward, the least expensive route; for the German owner, who receives no step-up, a sale during life under §§ 16 and 34 EStG or a gift under the business property relief can be preferable. In a family that spans both countries, the route has to be chosen with both results in view.
Part VI. Practical steps
- Separate the ownership plan from the management plan, and write down who is to run the business and who is to share in its value.
- Establish the residence and citizenship of the owner and of each prospective successor, now and in the foreseeable future.
- Review the entity form, the shareholders’ or partnership agreement and any buy-sell agreement for compatibility with the plan, with S corporation eligibility and with Connelly.
- For German interests, check the business property relief requirements, the holding structure for foreign subsidiaries, and the exit tax exposure for any successor who lives outside Germany.
- Obtain a valuation that addresses both the American and the German method before any transfer.
- Arrange compulsory share waivers or compensation for the siblings who do not take over the business.
- Provide liquidity for the estate tax, the compulsory shares and any buy-out, for example through insurance held in an irrevocable trust.
- Coordinate the wills, trusts and powers of attorney in both countries so that the business can be managed without interruption on incapacity or death.
Conclusion
A family business is usually the largest and least liquid asset in the estate, and it is the asset most exposed to the mismatch between two tax systems. In the United States the planning works mainly with exemptions, valuation and time; in Germany it works with a relief that depends on the location of the business, the size of the holding and the conduct of the successor for years after the transfer, and with an exit tax that follows the shares abroad. A succession plan that addresses both systems, before the transfer, keeps the business in the family and the tax cost within what the business can carry.
How the firm helps
Ashford International Law PC advises owners of closely held businesses and their families on succession in the United States and in Germany: structuring the transfer of ownership and control, drafting and reviewing shareholders’ and buy-sell agreements, coordinating valuations, applying the German business property relief and assessing exit tax exposure, and planning the income tax on a sale. The firm also advises Western European family businesses on their American subsidiaries. Related pages on this site cover international estate planning, trusts, tax planning with non-US assets, nonresidents with U.S. assets, gift planning, marital agreements and gift and death-related taxes. The firm’s detailed guides, including the review of double taxation relief under the death tax treaties, are available on the Articles and Guides page.
This page is intended for general educational purposes and does not constitute legal or tax advice, nor does it create an attorney-client relationship. The matters described depend on the specific facts, the countries and states concerned, and the law in effect at the relevant time. Figures are stated as of September 2026 and must be confirmed before any decision.