Getting Your Estate Plan in Order for Succession Planning
Accumulating wealth and building a business over time takes a lot of hard work and planning. That’s why it’s so important to take the necessary steps to safeguard that wealth and your business from all the possible things that can crop up in the future, from evolving laws to changing times and generations and even unfortunate events.
Usually, this is the part where we would say, “that’s where estate planning in Huntsville, AL comes into play.” However, while estate planning is the key to securing your assets, succession planning also plays an important role in this, especially when you run a business.
Succession planning tends to get overlooked when it comes to estate planning, which is mostly because they’re two different beasts. However, estate planning and succession planning are two concepts intertwined enough to the point where they can drastically impact one another.
That’s why we’ll talk about the ins and outs of succession planning in your estate plan to ensure that your and your family’s future is as protected as possible.
Read on to learn more.
Succession Planning for Your Estate Explained
When you create a succession plan, you need to consider the scope of your entire estate. This is to ensure that your business succession plan and estate plan don’t end up with conflicting terms and cause confusion for the parties involved — which would include your family, business partners, and potentially, the Huntsville county probate courts.
Therefore, the first thing you need to know is the difference between estate planning and succession planning so that you don’t end up with a last will that overlaps with the terms of your business agreement.
Succession Planning
Succession planning is an essential part of estate planning. All estate plans require a comprehensive plan for your business to ensure its success and longevity should you pass on unexpectedly or become mentally or even financially incapacitated. Succession planning involves outlining a detailed strategy for how you would want the leadership of your business or company to be passed down should one of those events occur.
You can choose to pass on the leadership to an heir, a spouse, a trusted employee, a business partner, or even a group of employees. If this sounds familiar to you, it may be because succession planning is often referred to as “replacement planning” — because it is quite literally a plan to replace your status within the business if needed.
Succession planning ensures that your business will continue to run smoothly even after you’re gone. A solid succession plan should also specify the plan that will be adopted when the most important people within your company either pass away, retire, or quit to pursue other opportunities.
Of course, the primary objective of a succession plan — for all intents and purposes of this article — is to ensure that your business is not affected due to a loss of leadership (you) or other top partners or stakeholders. Having said that, you also need to understand that succession planning, much like estate planning, is not a one-off event. Instead, it’s an ongoing process that involves identifying potential replacements for the most important roles in your business, which can change over time.
In identifying these replacement leaders, you’ll also need to prepare them for the potential events that can lead to their takeover. Therefore, when you draft or update a succession plan, you also need to ensure that you’re setting up that next person for success.
When strategizing a succession plan for your business, you’ll want to consider the following:
Is your business a viable opportunity for the next generation? If so, do you have any children or other familial heirs that can be named to resume business leadership on your behalf?
Does the vision you have for the future of your business align with the vision of your potential successors? Do they align with your business’s core principles and brand identity?
Would it be best to sell the business and liquidate the provisions to provide your family with more financial security should you pass on or become mentally incapacitated?
How do you plan to train any potential successors to ensure they’re prepared to take on your official duties?
If you were to become temporarily incapacitated due to an illness or physical event, who would best fill your position for the time being?
Keep in mind that the goal of succession planning is to keep your business up and running. However, suppose the longevity of your business isn’t applicable, and your business cannot simply be sold off at the time of your death or incapacitation. In that case, your succession plan and estate plan should include a plan of dissolution.
Estate Planning
Estate and succession planning are often thrown around interchangeably. However, estate planning is a much broader concept than succession planning, as it refers to your entire estate. We’re talking about your home, vacation home, savings, retirement accounts, and anything you own that contributes to your overall net worth, like fine art, cars, jewelry, antiques, etc.
Of course, estate planning also includes any ownership interest you may have in a business or company, which counts towards your total net worth. So, to clear up the confusion, estate planning has to do with your business interests and how those interests contribute to your estate’s value, while succession planning has to do with creating an official document that outlines how your business will run and who will take over once you’re gone or incapable of managing it on your own.
Estate plans also include wills and trusts, however, it’s not just about money and valuable assets. It’s also a plan for your funeral and burial, any other last wishes you may have, or instructions on how to handle certain things, such as your private intellectual property or files.
Lastly, a comprehensive estate plan can keep your family’s time at probate court either short and sweet or completely at bay. Of course, it all depends on how much of your estate is left in your will, as the county courts will have to comb through it to ensure everything is accounted for and distributed accordingly. This can take anywhere between six months to a year — which is why your Huntsville attorney will likely recommend that you create living trusts wherever applicable.
The Connection Between Estate and Succession Planning
Technically, every generational transition in succession planning results in a significant shift in your wealth and how the distribution of your assets will play out. That’s why you need to revisit your estate plan every few years or after major life events. But, of course, the same goes for your succession plan in most cases.
However, your business may or may not have an expiration date, which is why it doesn’t get distributed like any other asset would — unless you plan to sell your business upon death and distribute the financial proceeds evenly among your heirs. That’s the key difference.
Of course, when you own and run a business, your estate plan must include a succession plan should you pass it on to someone in particular. In this instance, you can use a will to lay down the instructions for your succession plan, and you can use a trust to ensure that your business ownership is transferred to a specific heir (and to alleviate any potential estate taxes).
In a sense, you can consider your succession plan an estate planning strategy, although it can work independently of your estate should things change. For example, you may end up just living a long and healthy life, and therefore choose to retire and relinquish your leadership role at some point. Having a succession plan will allow your successor to step up and take over so you can retire while the business continues.
Ultimately, when you own a business, estate planning and succession planning work together to ensure that the transfer of your assets and protection of your family and business goes smoothly.
More on Succession Planning Differences
While succession planning is involved in estate planning, it needs to be understood that succession planning only focuses on two things:
The transfer of your business or role to a planned successor
The transfer of your business-related assets to said successor
A succession plan is a strategic tool that allows the transition of leadership roles, business ownership, and operations to run smoothly once you’re gone. Therefore it involves business-specific considerations, such as the following:
The assessment of your leadership position and the qualities and experiences required for the success of future business
How training and preparing leaders within your business should look
The analysis of your business’s future needs
The establishment of a vision for your business’s future
The evaluation of your business’s viability in the hands of your chosen successor or future generations
As a business owner, it’ll always be recommended to thoroughly vet your potential successor or the future generations that may take over your business, such as your employees. You need to ensure that these people have an interest in taking over and are willing and prepared to do so.
Keep in mind that as a part of succession, liquidation is always an option if you don’t feel there’s a viable future for your business. In this case, you’ll need to ensure that you’ve written clear directives for liquidation (which will be part of your business dissolution plan). Even if you do want your business to be passed on, it’s still a good idea to create a dissolution plan as a backup.
Lastly, your succession plan must include a buy/sell directive when you have business partners. Buy/sell agreements are pre-arranged contracts which provide instructions for when a business interest is sold — regardless of the triggering event.
The Consequences of Not Planning Ahead
When you inadequately plan —or don’t plan at all — for your estate or the takeover of your business, you’re essentially leaving your family and employees vulnerable to financial and emotional stress.
Fortunately, estate planning and succession planning go hand-in-hand, so you can cohesively plan for both simultaneously. All you have to do is give us a call and schedule a consultation with Sarah S. Shepard or another experienced Huntsville attorney, so we can get you started on creating an effective and efficient estate plan that accommodates your business’s future with a solid succession plan.