Business Succession Planning and Your Estate

As Benjamin Franklin said, “There are two guarantees in life, death and taxes.” But if you’re a business owner, there’s likely another guarantee … a day will eventually come when it’s time to hand the keys to your business to someone else.

If you are like most business owners who are thinking of transitioning to life’s next chapter, you most likely want to be sure your team and your customers are well taken care of as you exit the business. That takes a lot of thought and planning.

Additionally, a well-conceived business succession plan is an absolute must to maximize your family’s financial security while keeping your business intact. Put simply, business succession planning refers to the practice of using estate planning strategies to transition a family business. A properly designed plan integrates the business's plan with the overall objective of the estate, to form one cohesive plan.

The paradox of building a successful business is that the more successful it becomes, the bigger and more complex the estate becomes. When business owners fail to account for their business as part of their estate, they risk the loss of the business when the estate needs to be settled. Working with an established Trustee or Wealth Advisor can provide stability, continuity, and a collaborative partnership for the family.

Goals for an Estate Strategy

Aligning business and family objectives can help create a unified strategy that influences every aspect of your estate. You’ll want your estate strategy to provide:

• Continuity and Stability: a good strategy ensures the business operates smoothly during transitions, maintaining stability for employees, customers, and stakeholders.
• Value Preservation: a well-thought-out strategy will also aid in preserving the business’s value by reducing disruptions and minimizing conflicts among successors.
• Family Security: offering a roadmap to financial security, your strategy should detail how the business will be managed and identify who will benefit from its profits.
• Legal and Tax Benefits: an essential part of your strategy is to facilitate the use of legal and tax strategies to minimize liabilities and ensure a smooth transfer of ownership.

Challenges to Navigate

Over time, businesses typically become interwoven with the business owner and their estate. In fact, many business owners encounter unique issues in estate planning due to the complexities of their business and their personal connections to the venture. Some common difficulties include:

• Valuation of Business Interests: determining a business’s fair market value can be complex, requiring specialized expertise and a thorough evaluation of assets, industry trends, and financial performance.
• Tax Implications of Business Transfers: transferring ownership interests, whether through a lifetime sale or at death, can trigger significant tax liabilities including capital gains and estate taxes. Careful planning is essential to minimize tax burdens.
• Key Employee Considerations: a business owner’s estate plan should address key employees, and include strategies for their retention, succession or replacement.
• Estate Liquidity: ensuring the estate has adequate liquid assets to satisfy estate taxes, business debts, and other expenses will help prevent financial strain and potential business disruption.

As a business owner, your estate plan needs to be carefully coordinated with your vision for the succession of your business to ensure continuity. Family businesses often run into trouble if the plan doesn’t include designated roles for each family member and specific guidance for how the business should be controlled.

Bottom line, it’s essential for every business to have a succession plan in place. You never know what tomorrow may bring. Having an up-to-date succession plan positions you to take the necessary time to move through an orderly exit strategy and enjoy the next chapter with the least amount of stress.

Then, when you have your plan in place, be sure to keep it updated as conditions change, people move on, or your goals evolve. Seeking the professional guidance of an advisor who is well-versed in the nuanced legal, tax and administrative requirements of Trust and Estate Management is a great place to start.