One of the biggest misconceptions is that estate planning and succession planning are one in the same

Succession plans are critical to the sustainability of a business. Even the most successful closely held business owners find succession planning more difficult than other critical business decisions. One of the biggest misconceptions is that estate planning and succession planning are one in the same.

Succession planning directly relates to the actual business itself. It is the strategy that will enable it to continue to operate smoothly and effectively as it is passed onto future generations, partners, or successor owners. Estate planning relates to all the assets in an individual’s estate including any ownership interests in closely held businesses.

For succession planning, important questions to consider when developing your succession plan include:

• Is the business viable into the next generation? If so, do family members not currently in the business intend to join the business and what is their vision? How do their individual visions align with the current vision of the business and other family members interested in the business as well?
• Should the business be sold to provide liquidity for future financial security?
• Who will take over running the business if not sold and are they properly qualified and appropriately trained to do so? If not, can they be and how so?

For business success, it is important to promote training and leadership preparation inside the organization and to keep in mind the future needs of the business.

Business succession planning should solidify the continuity structure for your business, whatever your wishes may be, while estate planning allows the opportunity to carry out your wishes for all of your assets (business and otherwise) during your lifetime, during a period of incapacity, and after your death.

Important questions a business owner should consider when developing an estate plan include:

• What are the individual’s sources of wealth (all types of assets) and their potential estate tax exposure?
• How does the individual define financial security and how much of their current wealth is below or in excess of that amount?
• Are any insurance and investment portfolios owned? Can they be used as liquidity to pay estate tax liabilities?
• What is the plan for final health care directives, funeral costs, and a distribution of the assets?

Estate planning also has the capability of reducing exposure to estate and other taxes, arranging for professional investment management for yourself or future generations, and bypassing probate.

Not surprisingly, conversations about ownership, wealth, and responsibility of the family and key business personnel could be awkward and can lead to disagreements within the family and/or owners. Without consideration of a complete plan that includes both a succession plan for the business and an estate plan, serious financial and emotional consequences can affect your family business.

For example, if the issue of estate equalization among all family members is a priority of the business owner, the succession plan and the estate plan must be coordinated. If the estate plan leaves the business to those children who are involved in the business, then the plan must provide how the uninvolved children will receive their “share” of the estate. If the estate is subject to estate taxes and a plan has not been made to provide liquidity for payment of taxes, the results could leave the uninvolved children with no assets while the involved children receive the business; or the business may have to be sold to pay the taxes and the business owner’s succession plan is thwarted.

Lack of a succession plan can result in (i) unclear direction for the business without a known leader; (ii) loss of employee faith in company leadership; (iii) power struggles among middle management; (iv) family units broken apart over disagreements; and (v) a potential loss in value due to a key person discount when surviving shareholders go to sell the business.

Lack of estate planning often results in (i) unforeseen estate tax liability; (ii) probate court costs; (iii) delay in distribution of assets and resolution of the estate; and (iv) potential litigation costs associated with the disagreements among living family members.

If you own a business, both types of planning are essential to help to streamline the transfer of your assets, to maximize family harmony, and ultimately to protect the legacy you’ve worked hard to create. The old adage “don’t put off until tomorrow what you can do today” perfectly applies to business succession and estate planning.

This article summarizes aspects of the law.  It does not constitute legal advice nor does it create an attorney client relationship.  For legal advice for your situation, you should contact an attorney. 

Column first appeared in the Vancouver Business Journal on April 1, 2021.