The Missing Pillar in Succession Planning: What Happens If the Owner Loses Capacity First

A recent piece in the Wealth Strategies Journal, "Putting the Success in Succession Planning" by Katherine M. Sheehan, J.D., AEP, ATFA, lays out a genuinely useful framework for family business owners: successful transitions integrate estate planning, tax strategy, governance, and family dynamics, rather than treating succession as a single document or a single transaction. As Sheehan puts it, "succession planning is a continuing process, not a single transaction." That framing is worth taking seriously, and the article is worth reading in full.  It walks through discovery questions advisors should ask, the tension between equal and identical treatment among children with different roles in the business, the importance of keeping governing agreements current, the tax traps that come from planning too late (or too opportunistically), and a clear-eyed tour of the standard transfer techniques, from outright gifts to grantor trusts to GRATs.

What the article doesn't have much room to say (understandably, since its focus is on tax and transaction structure) is what happens when the owner's capacity, not just their eventual death or exit price, becomes the constraint. That gap is where elder law belongs in this conversation, and it deserves to be treated as a fifth pillar alongside the four Sheehan names, not an afterthought bolted onto the estate-planning piece.

Death Is the Predictable Trigger. Incapacity Is the One Nobody Plans For

Sheehan's discussion of governing agreements lists disability and incapacity among the triggering events a shareholder or operating agreement should address, and that's correct as far as it goes. But in practice, most closely held business owners we see have governing documents that handle death cleanly; there's a buy-sell provision, a valuation formula, and a funding mechanism.  Most, however, handle incapacity badly or not at all. That asymmetry matters more than it might seem, because incapacity, unlike death, doesn't resolve anything. It just freezes decision-making at the exact moment decisions are most needed: payroll still has to run, contracts still have to be signed, and a buyer's letter of intent still has to be responded to.

Without a plan, the default answer to "who signs for the company now?" is a guardianship or conservatorship proceeding, in which a court appoints someone to step into the incapacitated owner's shoes. That is close to the worst-case outcome for a business. It is public, it is slow, it typically requires court approval for major transactions, and it hands the outcome to a judge who has never met the company, the family, or the successor generation Sheehan spends so much of her article helping families evaluate. A business under conservatorship is not a going concern being carefully stewarded; it's an asset in limbo while the litigation clock runs on customers, lenders, and key employees who were never going to wait around to find out how it will be resolved.

The fix is not exotic. It's the same tools elder law attorneys reach for in almost every incapacity-planning conversation: a trust to manage life-time decision-making, explicitly addressing business decision-making, coupled with a strong competency clause appointing a primary care doctor, or other trusted professional, to make binding decisions regarding competency and capacity, together with a durable power of attorney that specifically and explicitly addresses business decision-making, rather than a generic financial power of attorney that a bank or transfer agent will hesitate to honor when a signature line reads "President and CEO."  A successor trustee named in advance, who already knows the family and the succession plan because they were part of the conversations Sheehan describes, can step in immediately and without a court filing. That is the entire difference between a transition and a crisis.

The Family-Dynamics Section Gets Harder, Not Easier, as the Owner Ages

Sheehan is right that regular family meetings and independent consultants help prevent the surprises that damage relationships, and that equal treatment among children doesn't require identical treatment when their roles in the business differ. Those points track closely with what we've written here before about family harmony in estate administration generally: beneficiaries who understand the reasoning behind a plan, because the person who made it explained it to them while still able to answer questions, are far less likely to contest it later.

The complication specific to aging business owners is that the window for that conversation is often shorter and less predictable than families assume. A plan that gets rewritten or finalized only after a health scare — after the diagnosis, after the first hospitalization, after the family has already started quietly worrying about the person's judgment — invites exactly the kind of substance-over-form scrutiny we discuss routinely regarding late-in-life planning.  Late, isolated changes to who controls a valuable asset are the single most common fact pattern behind will and trust contests. The lesson isn't unique to businesses, but businesses raise the stakes considerably because the "asset" in question is everyone's livelihood, and because a successor's fitness to run the company is a much more loaded question than a successor's fitness to inherit a bank account. The honest answer is that succession planning for a family business should start earlier than most owners are emotionally ready for it — not because death or incapacity is imminent, but precisely because nobody can know in advance whether it will be.

The Liquidity Event Is Also an Aging-in-Place Planning Event

Sheehan's closing point, that a sale or transfer changes the balance sheet but doesn't complete the planning, deserves one more layer for owners in or approaching their later years. A liquidity event that converts an illiquid, hard-to-value business into a diversified portfolio isn't just a tax and investment-policy question. For an aging owner, it is very often the first time there is enough accessible, liquid wealth to actually fund the kind of care they'd prefer as they age: in-home care, modifications that let them stay in their own house, geriatric care management, the sort of support that a personal care agreement can formalize and compensate family caregivers for providing. 

That money should be positioned with that purpose in mind,  held in a trust structure that can respond to a long-term care need without a new round of court involvement, and coordinated with the same updated powers of attorney, healthcare directives, and beneficiary designations Sheehan rightly flags as post-sale housekeeping. A founder who spent decades building a company's resilience deserves a resilient plan.

None of this competes with Sheehan's framework; it completes it. Estate planning, tax strategy, governance, and family dynamics address who ultimately owns and runs the business. Incapacity planning answers a narrower but more urgent question: who is legally authorized to act tomorrow, if the owner can't. Every family business succession plan should be able to answer both.

Buying/Selling a Business- Nuts and Bolts

This office often consults with clients regarding the sale of a business, typically in settlement of an estate.   The following is general information that can aid a client or a client's family in understanding the process and available options. 

I.  Corporations/Limited Liability Companies

Most business sales/purchases of corporations or companies (limited liability companies) are either executed through an Asset Purchase Agreement (APA) or a full equity/stock acquisition (also called a stock purchase, share purchase, or equity purchase). They differ fundamentally in what is being bought, how ownership and risk transfer, tax treatment, complexity, and continuity of operations.

A.  Core Distinction:  Asset Purchase vs. Full Acquisition

• Asset purchase: The buyer acquires specific assets (and typically only specifically assumed liabilities, if any) of the target business under an Asset Purchase Agreement. The seller’s legal entity continues to exist afterward and retains any excluded assets, liabilities, and the sale proceeds.  This seller's legal entity is typically either terminated or repurposed immediately after the sale. 
  cantrellfirm.com
• Full acquisition (stock/equity purchase): The buyer acquires all (or substantially all) of the ownership interests (shares of a corporation or units/membership interests of an LLC) from the owners. The buyer takes ownership of the entire legal entity itself, including all its assets and all its liabilities (known and unknown).
  cantrellfirm.com

Side-by-Side Comparison

Aspect	Asset Purchase	Full Equity/Stock Acquisition
What is transferred	Selected assets (equipment, IP, inventory, contracts, goodwill, etc.) and only agreed liabilities	Entire ownership of the legal entity (and therefore everything it owns and owes)
Seller’s entity after closing	Continues to exist; holds retained assets/liabilities and sale proceeds	Transferred to buyer; seller(s) exit ownership
Liability exposure	Limited: buyer assumes only liabilities expressly listed in the APA	Broad: buyer inherits all historical and contingent liabilities
Tax treatment (buyer)	Often favorable: step-up in tax basis of assets to fair market value; ability to amortize goodwill (typically over 15 years  in the U.S.)	Usually less favorable: carryover (historical) tax basis; no automatic step-up (unless special elections such as IRC §338(h)(10) or similar are available and elected)
Tax treatment (seller)	Often less favorable: potential ordinary income on certain assets; possible double taxation for C-corporations (entity-level tax + shareholder tax)	Often more favorable: typically capital gains treatment at the owner level; single level of tax in many cases
Contracts, licenses & permits	Usually require individual assignment and third-party consents; non-assignable items may not transfer	Generally continue automatically with the entity (subject to change-of-control clauses)
Employees & benefits	Often treated as new hires by the buyer; benefit plans usually do not transfer and must be recreated	Continuity—employees remain with the same employer; plans generally stay in place
Complexity & process	More complex and time-consuming: asset-by-asset transfers, title changes, consents, possible sales/use taxes	Simpler transfer of ownership interests; fewer mechanical steps
Business continuity	Potential disruption; buyer may need to re-establish relationships and re-title assets	High continuity; operations, contracts, and identity of the business remain largely intact
Typical preference	Preferred by buyers (liability control + tax benefits)	Preferred by sellers (tax efficiency + cleaner exit)

B.  Key Advantages and Disadvantages

Asset Purchase

• Buyer Advantages:
• Ability to cherry-pick desirable assets and leave unwanted liabilities behind.
• Tax step-up and amortization benefits that can improve after-tax cash flow.
• Reduced risk of unknown historical claims (e.g., environmental, employment, tax, or product liability).

• Buyer Disadvantages / Seller Advantages:

• Administrative burden and cost of transferring individual assets and obtaining consents.
• Risk that key contracts, licenses, or customer relationships cannot be assigned.
• Potential sales tax or transfer taxes on assets.
• Seller (especially a C-corp) may demand a higher price to compensate for less favorable tax treatment.

Full Equity Acquisition:

•  Buyer Advantages:

• Operational and contractual continuity with minimal disruption.
• Simpler mechanics and often faster closing once diligence is complete.
• Avoids the need to retitle assets or renegotiate every contract.

• Buyer disadvantages:

• Full assumption of all liabilities, including contingent and unknown ones.
• No automatic tax basis step-up (unless a special election is available and agreed).
• Greater due-diligence burden because the entire historical risk profile transfers.

C.  Practical Considerations

• Buyers commonly prefer asset deals when the target has significant contingent risks, when only part of the business is desired, or when maximizing tax benefits is a priority.
• Sellers commonly prefer equity deals for tax efficiency, simplicity, and a complete exit.
• Deal structure is heavily negotiated and influenced by the target’s entity type (C-corp, S-corp, LLC/partnership), the presence of minority owners, regulatory licenses, and tax elections that can sometimes make a stock deal taxed more like an asset deal (or vice versa).
• In both cases, the definitive agreement (APA or Stock/Equity Purchase Agreement) will contain detailed representations, warranties, indemnities, purchase-price adjustments, and closing conditions that allocate risk between the parties.

In short: an asset purchase lets the buyer acquire the business operations selectively while leaving the legal shell (and many risks) behind; a full equity acquisition transfers the entire legal entity and everything that comes with it. The choice is driven primarily by risk allocation, tax consequences, and the desire for operational continuity. Legal, tax, and accounting advice specific to the jurisdiction and parties is essential for any actual transaction.

II.  Sole Proprietorship

A sole proprietorship has no separate legal entity. The business and the owner are legally the same "person." There are no shares, units, or ownership interests that can be transferred independently of the individual.

• A true “full acquisition”/equity or stock purchase is not possible. You cannot buy the “company” itself because none exists as a distinct legal person.
• Virtually every acquisition of a sole proprietorship is structured as an asset purchase. The buyer buys specific assets (equipment, inventory, customer lists, goodwill, intellectual property, etc.) directly from the individual owner.
• Liabilities stay with the seller personally unless the buyer expressly assumes them in the agreement. The buyer generally does not inherit unknown personal liabilities of the sole proprietor simply by buying assets.
• Tax treatment follows the sale of individual assets (ordinary income on inventory/depreciation recapture, capital gain treatment on other items, allocation of purchase price under the residual method). The IRS generally treats the sale of a business as the sale of its individual assets.
  irs.gov
• Continuity issues (contracts, licenses, employees) still arise and often require third-party consents or new agreements, just as in a corporate asset deal.

In short, the classic “asset vs. stock” choice largely disappears; the deal is almost always an asset purchase.III.  Partnership: General Partnership, Limited Partnership, LLP, etc.

Partnerships are entities, so both structures remain available, but with different mechanics and tax rules than corporations:

• Purchase of Partnership Interests:  This is the equity equivalent of a stock purchase.  The buyer acquires ownership interests from the partners. This can transfer the entire entity. Tax treatment is more complex than a corporate stock sale. Gain on “hot assets” (unrealized receivables and inventory) is often ordinary income rather than pure capital gain. A §754 election can allow the buyer a step-up in the inside basis of partnership assets. Buying 100% of the interests is sometimes treated, for the buyer, similarly to an asset purchase under certain IRS rulings.
  irs.gov
• Asset purchase: The partnership sells selected assets (and may or may not distribute the proceeds or liquidate). Liability exposure for the buyer is limited to what is assumed, similar to a corporate asset deal. Tax consequences flow through to the partners.
• Liability Exposure:  Liability after sale depends largely on the type of partnership.  In a general partnership, partners typically have unlimited personal liability; buying interests can expose the buyer to that history unless carefully structured. Limited partnerships and LLPs offer more protection.
• Continuity:   Continuity of contracts, licenses, and employees is generally better with an interest purchase (the entity continues), but change-of-control or consent provisions can still apply.  In other words, continuity depends upon the partnership agreement, the specific relationship/contract at issue, and the terms of the sale. 

Overall, the buyer preference for asset deals (liability control + basis step-up) and the seller preference for equity deals still exist, but partnership tax rules (especially hot assets and basis adjustments) add extra complexity that does not apply to pure corporate stock sales.IV.  Online Self-Help / Informational ResourcesThere are free, non-commercial or government-affiliated educational materials and checklists that can help buyers and sellers understand the process and protect themselves through better due diligence and awareness. They are not, however, substitutes for professional legal, tax, or accounting advice.

• IRS (tax-focused, highly authoritative):

• Sale of a Business:  The IRS "Sale of a Business" overview page explains that a business sale is generally treated as the sale of individual assets, with links to relevant forms and rules.
• Sales and Other Dispositions of Assets: IRS Publication 544 covers allocation of purchase price, residual method, and capital vs. ordinary treatment of gain/loss.
• Partnerships: Publication 541 provides specific rules for sales of partnership interests.

• SCORE:   SCORE is a nonprofit organization and resource partner of the U.S. Small Business Administration. Its network of more than 10,000 volunteer mentors provides free, expert business mentoring, education and resources to entrepreneurs.  Among these are articles and webinars covering:

• Buying and Selling a Business:  Numerous articles and webinars, some state-specific, educate business owners and prospective buyers.

• Due Diligence:  SCORE offers checklists for buying or selling a business (covers financials, assets, contracts, legal standing, employees, etc.).
• Information Gathering: “Questions to Ask When Buying or Selling an Existing Business” checklist.
• Loans and Financing:  SCORE provides information and checklists regarding obtaining business loans. 
• Valuation: Articles and checklists on the due-diligence and valuation process.

• SBA and SBDCs:  The U.S. Small Business Administration (SBA) and related Small Business Development Centers offer:

• Guidance: General guidance on managing and transferring businesses, including the need for a formal sales agreement that specifies assets or ownership interests.
• Resources: Various free checklists from SBDCs (e.g., business buyer’s checklists that explicitly ask whether the deal is an asset or stock/interest purchase and what liabilities will be assumed).

• Other: Practical informational aids can be acquired from:

• Business Centers:  Free due-diligence checklists are published by university-affiliated or state small-business centers that walk through financial review, physical assets, contracts, UCC filings, licenses, and employee issues.

These materials equip clients to ask better questions, prepare stronger due-diligence requests, and recognize major red flags before signing anything. Because entity type, state law, and tax elections vary widely, the resources themselves repeatedly note that professional advice remains essential for the actual transaction documents and tax planning.

Inwood National Bank v. Fagin and Its Implications for Farmers and Small Business Owners

As individuals  plan for their legacy, the intersection of estate planning, business ownership, and elder law becomes increasingly critical, especially for farmers and small business owners who often rely on closely held business interests to sustain their families. A recent Texas Supreme Court decision, Inwood National Bank v. Fagin, No. 24-0055 (January 31, 2025), offers valuable insights into the complexities of transferring such interests into trusts, particularly when contractual restrictions and personal reconsiderations come into play. This case, while rooted in Texas law, has broad implications for Ohio and Missouri residents and others navigating similar challenges, especially those in agriculture or small enterprises.

Case OverviewThe Inwood National Bank v. Fagin case centered on Christy Fagin, who sought to transfer shares of Inwood Bancshares, Inc. (an S corporation) into a Qualified Subchapter S Trust (QSST) for her husband, Kyle, as part of estate planning. The shares were governed by a shareholder agreement requiring Inwood’s approval for transfers. The trust document listed the shares on Schedule A with the notation that Christy “intends” to transfer them upon Inwood’s approval. After initiating the process—prompted by the need to replace a lost share certificate—Christy reconsidered, realizing the transfer would make the shares Kyle’s separate property, irrevocable due to the QSST election. She withdrew her intent, never surrendering her replacement certificate, and Inwood did not countersign the necessary subscription agreement. Kyle sued Inwood for tortious interference, claiming the QSST owned the shares, but the Texas Supreme Court reversed the appeals court, ruling that the transfer was never complete due to the unfulfilled condition of Inwood’s approval.Legal AnalysisThe Court held that the transfer was subject to a condition precedent (Inwood’s approval), which was not satisfied despite the trust’s irrevocability. The conditional language on Schedule A distinguished this from an immediate gift, and the lack of bilateral performance (e.g., certificate surrender, countersignature) underscored that no enforceable contract existed. This decision aligns with prior cases like Smaldino v. Commissioner, which addressed transfer tax implications, but Inwood emphasizes the primacy of contractual conditions over trust intent when external approvals are required.Implications for Farmers and Small Business OwnersFor farmers and small business owners, this case highlights several key considerations:

• Transfer Restrictions in Business Agreements:  Many family farms and small businesses operate under shareholder agreements, LLC operating agreements, or buy-sell agreements that restrict equity transfers, often requiring management or co-owner approval. For instance, a farmer transferring farmland or equipment interests into an irrevocable trust to protect assets for Medicaid eligibility must navigate these restrictions. Evem a conveyance of business interests to a revocable trust must orient transfer considering these restrictions. Inwood clarifies that failure to secure approval renders the transfer incomplete, potentially leaving assets exposed to creditors or unintended heirs.

• Irrevocable Trust Challenges: Irrevocable trusts are popular for elder law planning to shield assets from nursing home costs, but Inwood underscores the risk if the grantor reconsiders mid-process. A farmer funding a trust with a 50% stake in a family LLC might change their mind upon realizing it reduces their control or income, as Christy did. The case suggests that until all conditions (e.g., co-owner consent) are met, the grantor can retract, but this delay could jeopardize Medicaid planning if within the 5-year look-back period (42 U.S.C. § 1396p).

• Revocable Trust Challenges:  Revocable trusts are often utilized by farmers and small business owners to orient their estate administration privately, outside of probate.  Trusts typically make challenge and contests more difficult by, among other things, including a "No-Contest" clause.  Failure, however, to properly assign, transfer, or convey business interests might open the trust estate estate to challenge or contest particulalrly, as is often the case, farming heirs are treated differently than non-farming heirs.  Non-farming heirs would not have to contest the trust, but the failure to properly convey business interests to the trust.

• Estate Planning Precision:  The decision emphasizes the need for precise drafting. Listing assets on a trust schedule with conditional language (e.g., “subject to approval”) protects against premature transfer claims, but farmers must ensure all parties, trustees, co-owners, and legal counsel, align on procedures. A small business owner transferring a machinery business interest might face disputes if the trust assumes ownership without formal transfer, as seen in Kyle’s failed claim.

• Marital and Succession Planning:  The Fagin’s marital discord post-transfer attempt mirrors issues common in family-run operations. A farmer transferring assets to a spouse’s trust might reconsider if it alters property division in a potential divorce. Inwood supports the grantor’s right to withdraw before completion, offering flexibility but requiring clear documentation to avoid litigation, as Kyle pursued.

• Elder Law and Medicaid Considerations:  
  For aging farmers or business owners seeking Medicaid, a disclaimer to redirect assets (e.g., to a child’s trust) could be affected by transfer restrictions. If approval is pending and the grantor retracts, as in Inwood, it may not trigger a penalty, but any subsequent transfer attempt within the look-back period could be scrutinized. Consulting an elder law attorney is crucial to document intent and timing.

Key Takeaways

• Contractual Compliance: Farmers and small business owners must strictly adhere to business agreement terms (e.g., approval processes) when funding trusts. Oral agreements or partial steps, as in Inwood, won’t suffice.
• Drafting Clarity: Trust schedules should explicitly note conditional transfers, avoiding assumptions of immediate ownership. This protects against disputes and ensures alignment with business governance.
• Flexibility and Risk: The ability to retract a transfer offers flexibility but risks delaying asset protection strategies, especially for Medicaid planning. Early coordination with co-owners and counsel is essential.
• Legal Guidance: Given the case’s emphasis on procedural rigor, engaging experienced estate and elder law attorneys is vital to navigate restrictions and protect generational wealth.

ConclusionInwood National Bank v. Fagin serves as a cautionary tale and a planning tool for farmers and small business owners. It reinforces that contractual conditions trump trust intent until fully executed, offering a safety net to reconsider but demanding meticulous execution. For Ohio and Missouri rresidents, where family farms and small businesses are cornerstones of rural economies, this ruling underscores the need for tailored estate plans that balance control, protection, and succession. Consult an attorney to align your trust funding with business agreements and elder law goals, ensuring your legacy thrives for future generations.