No, as a general rule, an estate executor should not retain control over voting business shares. The executor’s primary legal duty is to conservatively protect the value of estate assets, pay debts, and distribute the inheritance. Actively running a business is an inherently risky activity that directly conflicts with this core responsibility.
The central problem is the executor’s fiduciary duty of prudence, a legal standard codified in state laws like the California Probate Code and the Texas Estates Code. This rule demands an executor manage estate assets with the caution a reasonable person would use to preserve their own money, not to gamble it for growth. The immediate negative consequence is that if an executor runs the business and its value decreases—for any reason—beneficiaries can sue the executor for the loss, holding them personally financially liable for breaching this duty.
This is not a theoretical risk; while 90% of American businesses are family-owned, only about 30% survive to the second generation, a figure often made worse by poor succession planning and post-death mismanagement.
Here is what you will learn to navigate this legal minefield:
- ⚖️ Understand the legal trap that makes you personally responsible for any business losses and how to avoid it.
- 📄 Discover how one single document can override the deceased’s will and give you a clear, safe path forward.
- 💔 Learn the number one mistake executors make that pits family members against each other in costly legal battles.
- 💰 Master the critical steps to value the business correctly, satisfying both the beneficiaries and the IRS.
- 📈 Find out the key factors that determine whether you should sell the business immediately or attempt to keep it running.
The Executor’s Tightrope: Your Legal Duties vs. Business Realities
Being an executor for an estate with a business is like walking a tightrope. On one side are your strict legal duties, and on the other are the unpredictable demands of running a company. One wrong step in either direction can lead to a disastrous fall, both for the estate and for your personal finances.
What the Law Demands: The “Prudent Person” Rule Explained
The law holds an executor to a very high standard called a fiduciary duty. This means you must legally act in the absolute best interest of the estate’s beneficiaries. The most important part of this is the “prudent person” rule, which is found in state laws like New York’s Estates, Powers & Trusts Law § 11-2.3.
This rule requires you to manage the estate’s assets with the skill and caution of a reasonable person preserving capital, not a speculator chasing high returns. The primary goal is to prevent loss. Running a business involves taking risks to achieve growth, which is the exact opposite of what the prudent person rule demands.
This creates a direct legal conflict. If you decide to operate the business and it loses money—even due to a bad economy—the beneficiaries have a clear legal path to sue you. They can claim you breached your duty of prudence, and a court could order you to repay the losses from your own pocket.
The Four Duties That Can Land You in Court
Your fiduciary responsibility is made up of four distinct duties. Violating any one of them can lead to personal liability. Understanding them is your first line of defense.
| Fiduciary Duty | What It Means in Simple Terms | How Executors Get It Wrong |
| Duty of Loyalty | You must act only for the beneficiaries’ benefit, never your own. | Selling the business to yourself or a family member at a discount; using estate funds to invest in your own company. |
| Duty of Care (Prudence) | You must manage assets conservatively to prevent loss, like a careful person protecting their life savings. | Making risky investments with estate cash; failing to insure business property; continuing to run a failing business instead of selling it. |
| Duty of Impartiality | You must treat all beneficiaries fairly and equally, without playing favorites. | Siding with one sibling who wants to keep the business over another who wants cash; giving one beneficiary special access or information. |
| Duty to Account | You must keep perfect, detailed records of every single transaction and be ready to show them to beneficiaries. | Mixing estate funds with your personal money; refusing to provide financial statements when asked; having sloppy or missing records. |
Why Business Shares Are a Ticking Time Bomb in an Estate
Unlike a simple bank account or a portfolio of public stocks, shares in a private business are a uniquely dangerous asset for an executor. They are not a passive investment you can simply watch; they are an active responsibility that can explode into a full-time job with immense legal risk.
From Passive Owner to Accidental CEO
When you inherit shares of a public company like Apple, you don’t have to do anything. But when you take control of shares in a private family business, you may instantly become the person in charge. If the deceased was the sole owner and director, you, as the executor, must legally “step into their shoes” to maintain the company’s existence.
This means you may have to use the voting power of the shares to elect yourself as a director of the corporation. This isn’t for power or prestige; it’s a legal necessity to perform basic tasks like signing checks, making payroll, and paying vendors. Suddenly, you are no longer just an administrator—you are the temporary CEO, responsible for every aspect of the business’s operations and compliance.
The voting rights attached to the shares are the source of this power and peril. If the estate holds a majority stake, you have the authority to make critical decisions, such as approving a merger, selling major assets, or even dissolving the company entirely. This power must be used with extreme caution, as every decision will be judged against your fiduciary duties.
The Million-Dollar Number: Why a Professional Valuation Is Non-Negotiable
One of your first and most critical tasks is to determine the business’s exact value. This is not a suggestion; it is a legal requirement for multiple reasons, and you must hire a certified business appraiser to do it. A simple guess or an estimate from an accountant is not enough.
A formal valuation is required for three main reasons. First, the IRS requires it to calculate federal estate taxes, which are reported on Form 706. The valuation must follow strict federal guidelines, such as those in IRS Revenue Ruling 59-60.
Second, you need an exact value to distribute the estate fairly among the beneficiaries or to execute a buyout agreement. Finally, and most importantly for your own protection, an independent appraisal provides a defensible, third-party justification for the price if you decide to sell the business. It is your primary shield against lawsuits from beneficiaries claiming you sold it too cheaply.
This date-of-death valuation creates a high-stakes benchmark. Every action you take from that point forward will be measured against this number. If the business value declines while you are managing it, that initial appraisal becomes the primary piece of evidence beneficiaries can use to sue you for the financial loss.
The Document That Overrules the Will: Finding Your Instructions
While the will tells you who gets what, it is often not the most important document when a business is involved. A pre-existing legal agreement made by the business owners can override any instructions in the will. Finding and understanding this document is your most important job, as it may provide a clear and safe path forward.
The Buy-Sell Agreement: Your Get-Out-of-Jail-Free Card
For corporations, this document is called a Shareholder Agreement; for LLCs, it’s an Operating Agreement. Your first question to the deceased’s business partners should be, “Is there a buy-sell agreement?” This agreement is a contract between the owners that dictates exactly what happens when one of them dies.
The most common and helpful provision is a mandatory buy-sell clause. This clause legally obligates the estate to sell the deceased’s shares and obligates the surviving owners or the company itself to buy them. The agreement often specifies the exact price or a formula for determining it, removing any need for negotiation.
If such an agreement exists, your decision is made for you. You are not a business manager; you are a contract administrator whose job is to follow the agreement’s terms. This dramatically reduces your personal liability, as you are no longer responsible for the business’s performance—only for executing the sale correctly.
What Happens When There’s No Agreement?
Without a governing agreement, your role and risks depend entirely on the business’s legal structure. State law provides default rules, and some are far more dangerous for an executor than others. This is where your fiduciary duties come roaring back into focus.
| Business Structure | What Happens by Default | Your Biggest Risk |
| Sole Proprietorship | You become the direct operator, responsible for everything from paying bills to deciding whether to sell or shut down. | You have full personal liability for all business operations and any new debts incurred while you are in charge. |
| Corporation | You become a shareholder with voting rights. If it’s a 100% stake, you must appoint yourself director to manage the company. | You assume the full risk of running the company. Any decline in value can be blamed on your decisions, exposing you to liability. |
| LLC | The deceased’s “membership interest” passes to the estate. Your rights are governed by state LLC law. | This is extremely dangerous. In many states, if the operating agreement is silent on death, the LLC may be forced to dissolve, destroying its value as a “going concern”. |
| Partnership | The partnership agreement almost always dictates the outcome, usually a buyout by the remaining partners. | If there is no agreement, state law typically dissolves the partnership, forcing a liquidation of assets, which may be less valuable than an operating business. |
Three Executors, Three Fates: Real-World Scenarios
The choices an executor makes when faced with a business have dramatic and often permanent consequences. The following scenarios illustrate how different approaches can lead to success, failure, or a costly legal battle.
Scenario 1: The Hostile Takeover
An executor is also one of three children who are beneficiaries. The executor worked in the family’s manufacturing business and wants to keep it, but her two siblings, who are not involved, want to sell it and receive their cash inheritance. The executor uses her authority to keep the business running, hoping to turn it around.
| Executor’s Choice | Legal Consequence |
| Uses cash from the estate’s bank accounts to make payroll and buy new equipment for the business. | Breach of Impartiality and Mismanagement. The executor used liquid assets that belonged to all beneficiaries to fund a risky business venture that primarily benefited her own goal of keeping the company. The other beneficiaries sued, and the court ordered the executor to repay the estate for the funds she used and removed her from her role. |
Scenario 2: The Forced Sale
The deceased was a 50% partner in an architectural firm. Her will leaves her shares to her son, who is also an architect. However, the executor discovers a partnership agreement with a clear buy-sell clause that requires the estate to sell the shares back to the surviving partner at a price determined by a set formula.
| Executor’s Action | Legal Outcome |
| The executor explains to the son that the partnership agreement legally overrides the will’s instructions. He follows the contract, sells the shares to the surviving partner, and the son receives the cash proceeds as his inheritance. | Fiduciary Duty Upheld. The executor correctly followed the legal hierarchy, where a binding contract takes precedence over a will. He avoided a lawsuit from the surviving partner and fairly administered the estate, protecting himself from liability. |
Scenario 3: The Clueless Executor
A beloved local restaurant owner dies, leaving the business to his three children. He names his best friend, a retired schoolteacher with no business experience, as the executor. Feeling an emotional duty to honor his friend, the executor decides to run the restaurant himself during the probate process.
| Executor’s Decision | Financial Result |
| The executor makes several poor decisions: he changes the popular menu, fires the experienced head chef to cut costs, and reduces marketing. The restaurant’s revenue plummets. | Personal Liability for Negligence. The beneficiaries sued the executor for breach of his duty of care. The court found that a “prudent person” with no restaurant experience would have either sold the business immediately or hired a professional manager. The executor was held personally liable for the full amount of the business’s lost value. |
Top 5 Mistakes That Will Land You in Court
Managing an estate with a business is filled with legal traps. Certain mistakes are so common and so serious that they almost guarantee a lawsuit from beneficiaries. Avoiding them is critical to protecting both the estate and your personal assets.
- Going It Alone. The single biggest mistake is not immediately hiring a team of professionals. You need an experienced estate attorney to navigate the law, a CPA to handle complex tax filings, and a certified appraiser to value the business. Attempting to do this yourself is a recipe for disaster.
- Mixing Money. You must open a separate bank account for the estate and, if you operate the business, keep its finances entirely separate from the estate’s and your own. Mixing funds, known as commingling, is a massive red flag for courts and is often seen as a sign of self-dealing.
- Playing Favorites. When beneficiaries disagree, you cannot take sides. Your duty is to the estate as a whole, not to the beneficiary with the loudest voice or the one you like the most. Documenting your decisions and the reasons for them is crucial to proving your impartiality.
- Selling Assets to Yourself or Friends. This is called self-dealing and is the cardinal sin of an executor. You cannot sell the business or any of its assets to yourself, your spouse, your children, or any entity you control, even at what you think is a fair price, without explicit court approval. Such a transaction can be easily voided by a court, and you will likely be removed and surcharged.
- Keeping Secrets. You have a legal duty to keep beneficiaries reasonably informed. Failing to provide updates, ignoring questions, or refusing to show financial records breeds suspicion and is a direct invitation for beneficiaries to hire a lawyer and sue you to get the information they are entitled to.
The Ultimate Choice: A Pros and Cons Guide to Selling vs. Running the Business
The decision to sell the business immediately or to continue its operations is the most critical judgment call you will make. Each path has distinct advantages and severe risks. The right choice depends on the will’s instructions, the business’s health, your own expertise, and the estate’s financial needs.
| Pros of Selling Immediately | Cons of Selling Immediately |
| ✅ Drastically Reduces Personal Liability: You transfer the risk of business failure to the new owner. | ❌ May Violate the Deceased’s Wishes: A will or succession plan might have intended for the business to continue. |
| ✅ Generates Immediate Cash: Provides liquidity to pay estate taxes, debts, and administrative costs. | ❌ Potential for a Lower Sale Price: A quick, forced sale may not achieve the highest possible value. |
| ✅ Avoids Family Conflicts: Distributing cash is often simpler and fairer than dividing an operating business among heirs with different goals. | ❌ Destroys “Going Concern” Value: Shutting down operations to sell assets piece by piece is almost always less profitable than selling a running business. |
| ✅ Simplifies Estate Administration: Closing the estate becomes much faster and more straightforward. | ❌ Bad Market Timing: You may be forced to sell during an economic downturn, reducing the return for beneficiaries. |
Export to Sheets
| Pros of Running the Business (Temporarily) | Cons of Running the Business (Temporarily) |
| ✅ Preserves “Going Concern” Value: A functioning business is more attractive to buyers and commands a higher price. | ❌ Massive Personal Liability: You are personally on the hook for any decline in the business’s value. |
| ✅ Allows for a Better Sale Opportunity: You can wait for better market conditions or find the right buyer. | ❌ Requires Expertise You May Not Have: Managing a business in an industry you don’t understand is a form of negligence. |
| ✅ Fulfills the Deceased’s Succession Plan: Necessary if the goal is to transfer a healthy business to a specific heir. | ❌ Guaranteed to Create Beneficiary Conflicts: Heirs who want cash will object to you spending money to keep the business afloat. |
| ✅ Provides Ongoing Income to the Estate: Profits from the business can help cover estate expenses during administration. | ❌ Delays Estate Closure: Running the business will significantly prolong the probate process. |
Export to Sheets
Your First 90 Days: An Executor’s Do’s and Don’ts Checklist
The first three months after being appointed are critical. Your actions during this period will set the tone for the entire estate administration and can either prevent problems or create them. Follow this checklist to start on the right foot.
DO:
- ✅ Hire a Lawyer and CPA Immediately. This is not optional. You need expert legal and tax advice from day one to avoid making critical errors.
- ✅ Secure All Business Assets. Visit the business premises, change the locks, secure digital assets and passwords, and take control of all bank accounts.
- ✅ Find the Will and All Governing Documents. The most important document may be a shareholder, operating, or partnership agreement. It could contain a buy-sell provision that dictates your next steps.
- ✅ Open a Separate Estate Bank Account. All estate funds must go into this account. Never mix them with your personal money.
- ✅ Communicate Your Initial Plan to Beneficiaries. Send a written notice to all beneficiaries introducing yourself, confirming you have started the process, and providing a general timeline.
DON’T:
- ❌ Pay Any Beneficiaries. Do not distribute any money or assets to beneficiaries until all of the estate’s debts, taxes, and administrative expenses have been fully calculated and paid.
- ❌ Make Major Business Decisions Alone. Do not hire or fire key employees, enter into major contracts, or make significant capital expenditures without consulting your professional team and informing the beneficiaries.
- ❌ Use Estate or Business Funds for Personal Expenses. Even if you plan to pay it back, using estate money for personal reasons is a breach of duty and can be considered embezzlement.
- ❌ Promise the Business to Anyone. Do not promise a child or a key employee that they can take over the business. The distribution of assets must follow the will and the law, and a sale may be required.
- ❌ Ignore Minority Shareholders. If the deceased was a majority owner, you still owe a fiduciary duty to the minority shareholders. You cannot use your control to oppress them or act against their interests.
The Watchdogs: What Rights Do Beneficiaries Have?
While the executor is in charge, the beneficiaries are not powerless. The law gives them significant rights to monitor the executor’s actions and hold them accountable. An executor who forgets this does so at their own peril.
Your Right to Information and an Accounting
The most fundamental right a beneficiary has is the right to be kept reasonably informed about the estate. An executor cannot operate in total secrecy. If you are a beneficiary, you are entitled to ask for and receive information about the estate’s assets, debts, and the progress of the administration.
Most importantly, you have the right to demand a formal accounting. This is a detailed financial report listing every asset collected, all income earned, every expense paid, and all distributions made. If an executor refuses to provide an accounting when requested, a beneficiary can file a petition with the probate court to get an order compelling the executor to produce it.
How Beneficiaries Can Fire an Executor
If beneficiaries believe an executor is mismanaging the estate, stealing assets, or failing to do their job, they can take action to have the executor removed. This is not a simple process, but it is a powerful tool to protect an inheritance. The process begins by filing a petition for removal with the probate court.
A court will only remove an executor for a valid legal reason, known as “cause.” Common grounds for removal include:
- Mismanaging or wasting estate assets.
- Stealing from the estate or engaging in self-dealing.
- Failing to provide an accounting or communicate with beneficiaries.
- Having a conflict of interest that harms the estate.
If the court agrees that the executor has committed misconduct, it can remove them and appoint a replacement. The court can also surcharge the executor, which is a legal order forcing them to personally repay the estate for any financial damage they caused.
Frequently Asked Questions (FAQs)
- Can an executor take a salary from the business? No, not without explicit court approval or the written consent of all beneficiaries. Doing so is considered self-dealing and a conflict of interest, which can lead to your removal and personal liability.
- What if the business needs a loan during probate? Yes, an executor can seek a loan if it is essential to preserve the business’s value, but this is extremely risky. It increases the estate’s debt and your liability. You should only do this with court approval.
- Am I personally liable for the business’s old debts? No, you are not personally liable for debts the business incurred before the owner’s death. Those debts are paid from the estate’s assets. However, you can become personally liable if you mismanage the estate.
- What if beneficiaries disagree about selling the business? The final decision rests with you, the executor. Your choice must be based on your fiduciary duty to the entire estate, not the wishes of one beneficiary. Acting impartially is key to avoiding liability.
- How is a business valued for estate taxes? Yes, it must be valued at its Fair Market Value by a certified appraiser. The process follows IRS guidelines and typically uses a combination of asset-based, income-based, and market-based approaches to determine the value.
- Can I change the company’s board of directors? Yes, if the estate holds a majority of the voting shares, you can vote to elect or remove directors. This is a significant action and must be done solely for the benefit of the estate, not for personal reasons.
- What if I have no business experience? You should either decline the role of executor or immediately hire professionals to manage or sell the business. Attempting to run a business without experience is a breach of your duty of care and exposes you to liability.