If you own a business in Massachusetts, one of the most important planning questions you will face is how to transfer that business when you die or retire.
Two of the most common tools for business succession are buy-sell agreements and trusts. But they serve different purposes, and choosing the wrong one can create serious problems.
The good news is that in many cases, you do not have to choose. The best succession plans often use both.
What Is a Buy-Sell Agreement?
A buy-sell agreement is a legally binding contract between business owners that controls what happens when one owner leaves the business.
Buy-sell agreements typically address:
- Death of an owner
- Retirement
- Disability or incapacity
- Divorce
- Bankruptcy
- Voluntary departure
The agreement sets the terms for buying out the departing owner’s interest, including:
- How the business will be valued
- Who has the right (or obligation) to buy
- How the purchase will be funded
- Payment terms and timelines
What Is a Trust (and How Does It Work for Business Succession)?
A revocable living trust is an estate planning tool that holds assets and controls how they are managed and distributed.
When you transfer your business interest into a trust:
- You remain in control during your lifetime
- Your successor trustee can manage the business if you become incapacitated
- The business interest passes to your beneficiaries without probate when you die
- You can control how and when your heirs receive ownership
Buy-Sell Agreement vs. Trust
The main difference is who the business goes to and how the transfer happens.
| Buy-Sell Agreements | Trusts |
| Transfer ownership to business partners, co-owners, or the business itself | Transfer ownership to your chosen heirs (usually family) |
| Require someone to buy out your interest | Avoid probate |
| Provide liquidity for your family | Allow your family to keep the business |
| Prevent unwanted heirs from becoming owners | Provide management continuity during incapacity |
| Are funded with life insurance or installment payments | Control how heirs receive ownership over time |
In simple terms:
- Buy-sell agreements are for businesses with partners or co-owners
- Trusts are for businesses you want to pass to family
But the line is not always that clear.
When a Buy-Sell Agreement Makes More Sense
You should consider a buy-sell agreement if:
- You have business partners
If you co-own a business, a buy-sell agreement prevents your ownership interest from passing to your spouse or children (who may not be able or willing to be business partners).
It ensures that:
- Your partners can buy out your share
- Your family receives fair value for your interest
- The business continues smoothly
- You want liquidity for your family
A buy-sell agreement provides cash to your family instead of business ownership.
This is important if:
- Your family does not want to run the business
- The business requires expertise that your family does not have
- Your family needs immediate funds to cover estate taxes or living expenses
- You want to prevent forced sales
If one partner dies and their family inherits ownership, they may want to sell their share immediately.
A buy-sell agreement controls the terms of that sale and prevents outsiders from buying into the business.
- You want certainty about valuation
Buy-sell agreements include a valuation method (such as a formula, appraisal, or fixed price updated annually).
This prevents disputes about what the business is worth when a buyout occurs.
When a Trust Makes More Sense
You should consider using a trust if:
- You are the sole owner
If you own the business by yourself, a trust allows you to:
- Avoid probate
- Pass the business to your children or other heirs
- Maintain control during your lifetime
- Plan for incapacity
There is no partner to sell to, so a buy-sell agreement would not apply.
- You want your family to keep the business
If you are building a family business and want your children to continue it, a trust is the right tool.
A trust can:
- Delay full ownership until children are ready
- Appoint a manager to run the business until heirs are capable
- Provide income to heirs without giving them control
- Protect the business from creditors or divorce
- You want to avoid probate
Probate in Massachusetts can take months and create uncertainty for the business.
A trust allows the business to transfer immediately to your successor trustee or beneficiaries without court involvement.
- You need incapacity planning
A trust allows your successor trustee to manage the business if you become unable to do so.
Without a trust, your family may need to go to court for conservatorship, which can disrupt business operations.
Can You Use Both a Buy-Sell Agreement and a Trust?
Yes. In fact, many business owners use both.
Here is how they work together:
For multi-owner businesses:
- Your ownership interest is held in a trust
- The trust is a party to the buy-sell agreement
- When you die, the buy-sell agreement controls what happens to your ownership (it is bought out by partners or the company)
- The buyout proceeds go into your trust
- Your trust distributes the proceeds to your family according to your estate plan
For family businesses with key employees:
- Your ownership is in a trust
- You have a buy-sell agreement with key employees who will take over
- When you die, the employees buy the business using life insurance or financing
- The sale proceeds go into your trust
- Your family receives the proceeds instead of business ownership
This allows you to transition the business to capable managers while ensuring your family benefits financially.
What Happens If You Only Have a Trust and No Buy-Sell Agreement?
If you own a business with partners and you only have a trust (no buy-sell agreement), your ownership interest will pass to your trust beneficiaries.
That means:
- Your spouse or children become business partners with your former partners
- Your partners may not want to work with your family
- Your family may not want to be involved in the business
- Conflict and deadlock can occur
This is why buy-sell agreements are critical for multi-owner businesses.
What Happens If You Only Have a Buy-Sell Agreement and No Trust?
If you have a buy-sell agreement but no trust, the buyout proceeds will go through probate.
That means:
- Court involvement and delays
- Public filings
- Legal and administrative costs
- Your family may not have immediate access to the funds
A trust solves this problem by holding your ownership interest and receiving the buyout proceeds outside of probate.
How to Decide Which Tool Is Right for Your Business
Ask yourself these questions:
Do you have business partners?
If yes, you need a buy-sell agreement.
Do you want your family to keep the business?
If yes, you need a trust.
Do you want to avoid probate?
If yes, you need a trust.
Do you want liquidity for your family instead of business ownership?
If yes, you need a buy-sell agreement (possibly funded with life insurance).
Do you need incapacity planning?
If yes, you need a trust (and possibly a power of attorney).
In many cases, the answer is both.
Need Help Deciding Between a Buy-Sell Agreement or a Trust?
Choosing between a buy-sell agreement and a trust (or using both together) requires careful planning.
A well-designed succession plan can:
- Protect your business
- Provide for your family
- Avoid probate and court involvement
- Minimize taxes
- Prevent conflict among partners and heirs
If you own a business and need help deciding whether to use a buy-sell agreement, a trust, or both, the best next step is a conversation with an experienced estate planning attorney. Talk to us today.