The importance of succession planning in estate planning

Succession planning and estate planning are interrelated strategic issues that merit thought and action. However, many business owners make the mistake of creating one plan without accounting for the other.

“It is critical to undertake succession planning and estate planning as a joint effort,” says William J. Stein, an attorney at Semanoff Ormsby Greenberg & Torchia, LLC. “Business ownership has the potential to complicate an estate and requires careful planning to make a successful transition.”

Smart Business spoke with Stein about the intersection of estate planning and business planning, and strategies for the successful execution of each.

What is the correlation between succession planning and estate planning?

Succession planning is the careful identification and training of those who will not only take over the day-to-day operations of a company, but also lead it forward to future growth. The owner’s family members and other heirs will likely be affected by these decisions, as will the company’s business partners, employees, vendors and customers.

Estate planning involves, in broad terms, determining whom you want to receive your property, what you want them to receive and when they are to receive it. The people affected by it are family members and other heirs. For a business owner where a primary asset of the estate is the business itself, ensuring the future success of the business and preserving its value for the family is necessarily a key piece of the estate plan.

How can succession planning be made to have a positive impact on estate plans?

A good business succession plan should address both the management and ownership functions of the business. Management succession planning should include development, training and support of successors. It is also important to retain key employees to provide continuity in business operations.

Ownership transfer planning considerations include coordination between future owners and future managers of the business, consideration of the best interests of the business and the owner’s family, and whether there will be a transfer of the business during the owner’s lifetime. Structuring ownership to separate control from value can create significant flexibility in the owner’s estate.

Liquidity needs must also be addressed. Business owners are often highly illiquid because of the magnitude of business value compared to other assets. Ensuring that there is adequate liquidity plays a critical role in providing for family, replacing earnings and paying potential taxes. If liquidity is insufficient, the business may need to be sold prematurely.

What should the planning process look like?

Communication with and buy-in by core constituents is crucial to a successful planning process. Both succession and estate planning require honest discussions about an owner’s values, family and legacy, all of which become the basis for an integrated business succession and estate planning strategy. Family business stakeholders need to hold meetings and consult with their advisers to determine whether family members who might enter the business have a shared mission, vision and commitment to common values. Where there is a lack of skills and interest needed for management and leadership roles, successors must be identified and developed. For larger businesses, identifying and developing successors may take years. Smaller businesses may just need someone to oversee a sale or liquidation.

What mistakes should business owners avoid when creating their plans?

Business owners tend to engage in estate planning and ignore succession planning. However, until the succession planning questions are answered, it is difficult to implement a comprehensive estate plan. Also, it is important to have a written plan. Too often, business owners fail to put their plan in writing, leading to confusion and putting the business at risk when the owner is no longer there to be the driving force. With an integrated succession and estate plan in place, business owners can be confident that their company will continue down a path of success and their estate planning goals are achieved.

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