In this series on Estate Planning, we have discussed a range of aspects relevant for individuals - including wills, other forms of ownership transfer and trusts. There is however an additional dimension when it comes to estate planning for businessmen - and that is succession planning for the business. This article gives financial advisors a primer on the considerations involved in putting together a succession plan that will ensure business continuity and thus continuation of value creation for the beneficiaries of the estate.

Estate planning for any individual can be a time consuming process because there are many factors to consider. For business owners, estate planning can itself be a complicated process as they own larger and more intricate estates. They also need to consider issues relating to business succession and sort through complex personal and business relationships and complicated tax issues while contemplating estate planning.

For business owners, estate plan cannot stand alone and needs to be integrated with their financial, retirement and business plans. Not only should the plans of family members be considered but also the co-owners of the business. Succession planning is an essential step.

What is the difference between an estate plan and a succession plan?

While an estate plan includes all business and personal assets, a succession plan only refers to the business assets. A succession plan can take effect during the owner's lifetime. The focus of the succession plan is to provide for the transfer of the business interest to ensure the longevity of the business.

A succession plan can outline the sale or voluntary transfer of business interest to the successor while the owner is alive or it may outline the disposition of the business interest on death.

Experts recommend a succession plan should include a management transition plan for the business, an ownership transition plan and a contingency plan in case something unexpected like a health emergency occurs before the planned management and ownership transition occurs.

Aspects to consider in a succession plan

Some questions that should be considered while creating a succession plan:

1. Is there a buy-sell agreement with the co-owners of the business? How is the buy-sell agreement funded?

2. How does marriage, divorce, beneficiaries of one of the co-owners affect the business assets?

3. Is there an emergency plan if the owner is incapacitated or passes away before transferring ownership interest?

4. Has a successor been appointed? Is there a process established for selecting a successor for the business?

5. Is there a written plan for the transfer of business interests?

6. If the business is being left to one family member, are there arrangements to leave assets of equal value to other family members?

7. Are there any family members who have the business skills necessary to run the business? Is that family member interested?

8. Does the rest of the family members concur with the choice of successor?

If the business is co-owned, it is essential that there is a buy-sell agreement in place which sets out conditions by which one owner has the right to buy the ownership share of the other owner. Events which can trigger a buy-sell agreement can include death, disability, retirement or a dispute between owners. Some buy-sell agreements provide a method of valuing shares being sold if one of the events occurs.

Deciding approach and control

For families with multiple children and family members, owners need to decide how they want to approach their estate plan - the fair treatment or the equal treatment. These two concepts are not necessarily the same.

Treating the children equally means dividing the business interest evenly between them. The risk is that equal sharing of ownership and management may be disaster for the business. If the business fails, all of the family will suffer.

Some owners consider it may be fairer to transfer the business to the successor, the child who is most likely to ensure the success and longevity of the business. Other children are given assets of equal value that are unrelated to the business. However, this approach can cause animosity among the family if the successor is not accepted. Even when family members acknowledge the business acumen of the successor, they can still be unhappy and look at options to contest the estate plan. So an estate plan needs to be air-tight if the owner decides to consider the fair treatment approach.

Owners also need to consider whether they want to transfer complete control over the assets to the beneficiaries or to retain control over the assets. This is a decision that owners need to consider even they are not planning to gift the assets during their lifetime. If they don't want to transfer control of assets, owners can consider trusts to retain control over the assets so wealth is not misused or misappropriated by the successive generation.

What happens when there is no successor available? Owners may consider selling a business if there is a lack of interest or ability on part of the children to inherit. They can also considering selling for financial reasons such as selling it for a large profit and retiring. They may be able to obtain a higher price from a third party and use the proceeds to provide for their children.

Seeking advice

To formulate on what is the best approach for a succession plan, business owners can discuss with an advisory board. In addition to a lawyer, financial advisor, accountant, owners can also talk to non-traditional advisors such as a business mentor or close friends. If there is a dispute and competing claims, owners may consider going for a dispute resolution with a mediator to help resolve outstanding business and family issues that are hindering estate plan.

When developing the estate plan, it may be wise to consider asking family members for input. Owners may want to check if beneficiaries are getting the assets they really want. For example, if a business has several segments, it may be wiser to let children know who will retain and succeed which segment.

Once estate plan is finalized, owners need to determine who should be advised of its details. Providing information about the estate plan to the people affected by it allows them to address any concerns. This can help in tackling any unhappiness that leads to disputes. Financial planners also need to remind clients to secure agreement from administrators, trustees and guardians before appointing them in their estate plan.

Key employees, lenders and customers will only need to know the broader details relating to the plan for the business. For younger teenager children, owners may consider withholding details regarding the extent of the estate to ensure their children do not get lazy or lose their drive for ambition.

With time, personal and business circumstances will change. Financial planners should remind clients to ensure their estate plan reflects their current personal and business situation and is relevant.

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