USA – CONNECTICUT Law and Practice Contributed by: William Kambas, Lawton Leung and Samantha Kopf, Withers
8. Family Business Succession Planning 8.1 Succession Strategies
• In Sturm v Harb Development, LLC , 298 Conn. 124, 2 A.3d 859 (2010), the Connecticut Supreme Court emphasised that LLC members are bound by the contractual and statutory obligations set forth in their operating agreements – reinforcing the need for carefully drafted transition, voting and buy‑sell provisions. • Saunders v Firtel , 293 Conn. 515, 978 A.2d 487 (2009), further demonstrates that fiduciary duties among owners of closely held businesses can be significant; majority owners may owe partner‑like obligations to minority family members, making clarity in compensation, control and management provisions essential. • In valuation and buyout contexts, Coppola v Bear- ing Inspection Services, Inc. , 201 Conn. 455, 518 A.2d 1030 (1986), remains influential, underscoring the need for explicit valuation methodologies in agreements to avoid disputes during redemptions or ownership shifts. Statutory rules governing transferability – such as share transfer limits under Conn. Gen. Stat. § 33‑683 and transferee rights limitations under § 34‑259b – can restrict or facilitate lifetime gifting, phased transfers or family‑level buyouts. As a result, business owners must ensure that operating agreements, shareholder agreements and partnership agreements are drafted or revised to support the desired succession struc- ture. Trusts, family limited partnerships and manager‑man- aged LLCs often serve as vehicles for both succes- sion and estate planning. These structures operate under the Connecticut Uniform Trust Code (Conn. Gen. Stat. §§ 45a‑501 to 45a‑599g) and the state’s LLC and partnership statutes. Entity conversion and domestication rules (Conn. Gen. Stat. §§ 34‑600 to 34‑647) also allow businesses to realign their struc- ture to achieve governance or tax efficiencies without interrupting operations. When succession planning involves sales to key employees or outside buyers rather than family members, additional legal frameworks become rel- evant. Connecticut’s employment statutes, including restrictions on non‑competition agreements (Conn. Gen. Stat. § 31‑50b et seq) and wage payment rules
Family business succession planning is common due to the state’s relatively high concentration of closely held businesses in joint ventures, financial services, healthcare, aerospace and real estate. Planning fre- quently uses entity‑based structures such as fam- ily limited partnerships or LLCs to facilitate gradual ownership transfers, support valuation particulars and centralise control, often combined with trust structures – including non‑grantor trusts – to address long‑term governance, asset protection, and state income and transfer tax considerations. Insurance‑funded buy‑sell arrangements are subject to leading cases such as Connelly v United States (June 2024), where the US Supreme Court held unani- mously (9–0) that life insurance proceeds payable to a corporation must be included in the corporation’s fair market value for federal estate tax purposes at the deceased shareholder’s death, even when the proceeds are contractually obligated to be used to redeem a deceased shareholder’s interest. There are also regular understanding and use of ownership tran- sition plans to provide management continuity and liquidity when needed. Succession planning is regularly done both by busi- ness owners and by fund principals. In either case, gifts to intentionally defective grantor trusts, the use of grantor retained annuity trusts (GRATs), and for those who are charitably inclined the use of charita- ble remainder trusts (CRTs) are commonly employed to facilitate tax‑efficient transfers of appreciating interests or investments ancillary to the fund inter- ests and/or business. Charitable planning plays a meaningful role for many Connecticut families, with lifetime and testamentary gifts to private foundations, donor‑advised funds and charitable trusts frequently integrated alongside business succession objectives. 8.2 Legal and Tax Considerations Connecticut case law provides guidance on govern- ance and ownership transition risks.
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