Advances in medicine have extended life expectancy, but longevity has introduced a new and increasingly common risk for closely held businesses: cognitive decline among owners and key employees. Dementia is no longer a remote concern reserved for older adults; it’s a statistically foreseeable business risk that must be factored into succession planning, governance and tax planning.
Columbia University researchers found that almost 10% of U.S. adults ages 65 and older have dementia, while another 22% have mild cognitive impairment. Researchers also found that rates of dementia and mild cognitive impairment rise sharply with age: 3% of individuals between 65 and 69 had dementia, rising to 35% for individuals ages 90 and over.
For clients with closely held businesses, professional practices and investment entities, dementia presents a uniquely disruptive risk that they can’t afford to leave exposed. Unlike sudden death, cognitive decline is often gradual, ambiguous and contested, creating uncertainty about a business leader’s authority, the validity of decisions and the enforceability of transactions.
Unique Succession Problems
Traditional succession planning focuses heavily on death or voluntary retirement. Dementia, however, introduces a prolonged “gray zone,” in which an individual may still be alive, nominally in charge but increasingly incapable of fulfilling fiduciary, managerial or professional duties.
Key risks include:
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Invalid or challengeable contracts executed during periods of diminished capacity.
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Operational paralysis caused by unclear authority.
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Increased uncertainty among employees.
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Family and partner disputes over when intervention is justified.
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Regulatory and malpractice exposure in licensed professions.
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Financial exploitation risk for the affected individual.
Without advance planning, businesses may find themselves unable to remove or replace a key decision maker without court intervention, often at precisely the moment when speed and clarity are most needed.
Key Employees vs. Non-Key Employees
From a planning perspective, your clients must distinguish between key employees and non-key employees.
Your clients may be able to address incapacity issues for non-key employees by using a joint decision-making structure, such as a board of directors or managing partners. However, for a key employee (for example, founder, rainmaker, investment decision-maker, family member or managing partner), incapacity can directly threaten the enterprise value of your client’s business.
When mental or physical health issues directly affect a key employee’s ability to perform:
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Decision-making authority must shift immediately.
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Management continuity must be preserved.
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Client, lender and investor confidence must be protected.
These outcomes are rarely achievable without advanced planning and pre-existing legal documentation.
Limitations of Wills
A common misconception among many business owners and family members is that a will is sufficient to address succession issues. In reality, a will is largely ineffective during lifetime incapacity.
A will:
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Becomes effective only at death.
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Doesn’t transfer operational control during incapacity.
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May require probate administration.
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Often delays action and increases costs.
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Publicly discloses sensitive information.
As a result, wills play only a limited role in addressing dementia-related succession issues in operating businesses.
Powers of Attorney and Governing Documents
The most effective tool for addressing incapacity in a business context is a properly drafted financial power of attorney, which should be coordinated with the entity’s governing documents.
Best practices include:
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Durable FPOAs that explicitly authorize business decisions.
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Multiple or layered POAs (for example, operational, financial, digital assets).
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Entity documents that recognize and defer to designated decision makers.
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Employment and partnership agreements that permit immediate removal or reassignment on incapacity.
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Durable medical POAs that empower family members to make certain medical decisions on behalf of the key employee.
Importantly, these documents must be executed before cognitive decline becomes apparent in a key employee of your client’s business. Once capacity is questioned, even well-drafted documents may be subject to challenge.
Advising Closely Held Businesses Proactively
For family-owned and closely held businesses, dementia planning should be integrated into:
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Shareholder, limited liability company and partnership agreements.
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Buy-sell arrangements.
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Employment agreements.
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Family trusts and governance frameworks.
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Banking and investment authorizations.
As a trusted advisor, you should encourage clients to periodically re-examine these documents, particularly as owners and key executives age. Don’t assume that legacy documents will suffice.
Six Pre-Death Planning Areas
When a key employee or owner is diagnosed with dementia or another serious health condition, pre-death tax planning becomes both time-sensitive and highly consequential. While planning must respect ethical boundaries and capacity standards, the earlier you can help clients address these issues, the more family and business wealth you can help them preserve.
Even with the One Big Beautiful Bill Act’s increase in the lifetime estate exemption to $15 million per spouse, tax planning opportunities are plentiful and can be highly impactful.
Here are six key planning areas in which you can provide significant value to clients and families who own privately held businesses and firms:
Basis and income tax planning. Evaluate whether assets should be sold or gifted, pre-death, or retained for a potential step-up in basis at death.
Consider having your clients gift qualified small business stock/Internal Revenue Code Section 1202 to a non-grantor trust that can benefit from additional qualified small business stock exclusions and receive its own separate state and local tax deduction and qualified business interest limitation.
Also, help clients with the following basis and tax planning strategies where appropriate:
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Defer gain (for example, IRC Section 1031/like-kind exchanges, opportunity zone investing) recognition when feasible.
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Review installment obligations, partnership interests, individual retirement accounts, personal residences, rental properties and other low-basis assets.
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Evaluate IRAs for potential distribution or Roth conversions.
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Use tax-inefficient assets that are treated as income in respect of a decedent (no step-up) to fund any testamentary bequests.
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For larger estates, review life insurance ownership /structure to fund a buy-sell agreement, considering the recent Connelly case.
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For taxable estates, leverage the gift tax exclusion for lifetime gifts directly paid for tuition or medical expenses.
Estate freezing and transfer strategies. These include:
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Establishing grantor retained annuity trusts (GRATs), or sales of assets to intentionally defective grantor trusts (IDGTs), or recapitalizations executed before a key employee’s capacity is impaired.
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Swapping low-basis assets held in an IDGT for high-basis assets to obtain a step-up on death.
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Freezing business value while future appreciation shifts to heirs or trusts.
Buy-sell agreement review. This includes:
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Ensuring valuation mechanisms function properly in incapacity scenarios.
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Confirming funding sources (insurance vs. cash flow).
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Avoiding forced sales at depressed or disputed values.
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Ensuring tax planning documents are consistent with buy-sell agreements.
Compensation and deferred compensation planning. This includes:
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Accelerating or restructuring compensation arrangements.
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Reviewing deferred compensation, bonuses, options and equity vesting provisions.
Charitable and legacy planning. This includes:
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Implementing charitable remainder trusts or donor-advised funds while a key employee’s capacity is intact.
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Aligning philanthropic goals with income and estate tax efficiency.
Coordination with succession and governance. This includes:
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Ensuring tax strategies align with future operational succession plans.
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Avoiding tax-driven actions that undermine business continuity.
Assisting clients with pre-death planning is most effective when conducted early, collaboratively and with clear documentation of capacity and intent.
Bottom Line
Dementia and serious health challenges are no longer rare or unforeseeable events. They’re predictable risks that demand proactive tax, financial and succession planning. For closely held businesses and professional firms, failing to plan for incapacity can be more damaging than failing to plan for death.
Advisors who integrate medical realities into succession, governance, and tax planning provide clients not only with technical value but also with long-term stability, dignity, and protection of their legacy.
