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Estate Plans and Succession Plans … Same Thing, Right? Not on Your Life!

Estates with an operating business require succession planning to achieve full clarity

By Tim Young & Michael Kenneth

The first time we sit down with a business owner or entrepreneur to discuss their life and long-term planning needs, it’s not uncommon for us to hear: “Oh! I don’t need a succession plan. My estate planning is all done, so I’m in good shape there.”

We hear that a lot. And it points to an increasingly common misunderstanding about the types and necessity of long-term planning for business owners: estate plans and succession plans are not the same thing. Not on your life and not by a long shot. They’re two fundamentally different things that have fundamentally different purposes.

While an estate plan can identify who will own the business upon an owner’s death, it doesn’t answer critical questions about operation and preservation of the business going forward, which is the territory of a succession plan. That said, both plans are necessary and should be developed in concert—with all advisors at the table—so that business continuity and issues of fairness and equity related to the entire estate are addressed at the outset.

Let’s take a closer look.

Components of an Estate Plan

Most entrepreneurs have engaged legal and financial advisors to create an estate plan and execute legal documents that support the plan. These plans typically address the personal wealth of the entrepreneur and his or her family.

They often focus on death as the trigger event, with strategies for minimizing taxes and maximizing wealth to heirs or charity. If an estate plan addresses a business, it is often limited to a life insurance policy placed in a trust, providing liquidity to heirs at the owner’s death. When an operating business is involved, it is included in the estate but the estate plan itself does not contemplate leadership or management succession or business governance.

Common estate plan components include: 

  • A family trust or revocable living trust, which includes provisions for what happens when a husband and wife are alive, when one spouse passes away and ultimately when both spouses die
  • Disposition of assets – to whom and how they are allocated
  • Wills
  • Powers of attorney – Healthcare and Durable
  • Healthcare directives

 Estate plans are typically made when a person’s net worth exceeds one million dollars ($1,000,000) and are especially crucial when one’s net worth grows to the level of creating a taxable estate based on current or future estate tax legislation.  Well-drafted estate plans cover multiple generations and cover disposition assets not just to their children but to grandchildren as well.

 Components of a Succession Plan

A succession plan is focused exclusively on the operating asset—the company. It is the road map for how family members deal with the business going forward when the owner exits, whether by retirement or death.

Actuarially, most owners will not die before they step away from their business. Succession planning allows the owner to do that successfully on his or her own terms. Without it, the brilliant architects of their personal and business success fail to be the architects of their business succession.

A succession plan considers all five levels of succession in the context of what the owner wants the business to look like in the future:

  • Ownership: Who is going to own the business as it presents itself today?
  • Leadership: Who is going to lead the business once the owner exits? The new owner?  Maybe but not necessarily. Ownership and leadership are not the same thing.
  • Management: Current management is often considered alongside current leadership. However,  good managers do not necessarily make good leaders.
  • Relational: Internal and external audiences/relationships: employees, customers, vendors and the community.
  • Cultural: How will the owner’s departure affect the culture? Strong workplace cultures are worth their weight in gold.

While estate plans consider family members, succession plans consider family, plus employees, customers, vendors and even the community. For more information on the five levels of succession, click here.

The Fairness Factor: Integrating Succession and Estate Plans

It would be a huge understatement to say that estates and estate planning can be the source of—to say it charitably—disagreement among family members with perceived fairness being the driving concern. That is because estate planners often follow the path of least resistance by allocating assets—including an operating business—equally, which elicits responses such as:

“Why does X get half of the business when he hasn’t been involved?

I’ve spent my entire career helping Mom and Dad build this company. It’s just not FAIR!!!”

Estate plans are often made in a vacuum. They generally don’t incorporate business succession planning, and fairness issues arise when multiple heirs are involved and, almost invariably, when some are engaged in the business and other are not. These issues run not just the risk of family dissension but can place the operating business itself in serious jeopardy.

Estate planning as a discipline does not address the essential preparation that can ensure your business continues past your leadership. It also does not address the interim work that can dramatically impact and increase or decrease the value of the business at the time of exit.

Taking a holistic approach and developing estate and succession together, incorporating all parties— CPA, estate planning attorney, wealth management advisor, exit planning advisor—allows an owner to tackle the issues of equity and fairness for all audiences at the outset rather than divisively later on.

This table offers a quick glance at the differences between estate and succession plan from several key perspectives.

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March 28, 2023 in Business Planning, Collaboration, Know your story, Succession Planning

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