Succession Planning Part 2: The Convergence of Exit and Estate Planning
As a forward-thinking business owner, you have carefully considered who will lead your company in the future. If you are just beginning that process, my earlier discussion of establishing an exit strategy for your business is a good place to start.
Now in part two of our look at establishing a comprehensive, cohesive exit strategy, it is time to merge your succession plan with your estate planning goals.
Estate planning is complex even without the added dimension of planning a business sale or transition. It also brings up a host of uncomfortable issues, such as facing your own mortality and addressing long-standing family conflicts or concerns.
But it is as essential as business planning to ensure that your family can navigate as smoothly as possible through a transition.
Know your estate's true value.
Many entrepreneurs don't feel wealthy. They have spent years pouring time, effort and money into their businesses. Any excess cash flow went right back in to the company.
That sweat equity, however, adds up. When all things are considered, the value of your business may exceed current estate tax limits.
If heirs have to write a large check for estate taxes, it could cause significant pressure on the business to create that level of liquidity. Other non-optimal assets such as IRAs or privately held investments may need to be sold to cover it.
Your advisors can help devise an estate plan that minimizes taxes and provides liquidity in the event of an untimely death.
Make tax-smart wealth management moves.
As amazing as it sounds, the federal estate tax is sometimes referred to as voluntary. Why? There are so many opportunities to plan around it.
One approach is to transfer shares of the business into a trust that benefits your children or other family members. The value of the shares at the time of the transfer is removed from your estate, potentially allowing future appreciation to be estate tax-free.
You may also be able to claim a discount of the value of the shares transferred to the trust depending on whether the shares are owned by a minority shareholder, or if there is a lack of marketability of the company, which is often the case in closely held entities.
You can also enjoy the creditor protection, avoidance of probate, and limiting beneficiaries' access to funds that you find in all trusts. Be sure to work closely with your tax team, however, as trusts often have less beneficial tax treatment.
Cut the complexity.
A common goal in life, business and estate planning is to keep it understandable and maintainable. Don't let your estate plan get so complex that no one, including you, can explain the big picture.
Over time, as family and investment needs change, the number and type of trusts and business entities can balloon, leaving a hodgepodge of entities that have different purposes, tax implications, estate implications and control issues. No one can remember why ABC LLC was set up in 1998 and whether a property should have been transferred into the family limited partnership or the children’s trust.
Worse, beneficiaries and entity managers set up years ago may not coordinate with your current estate plan documents, causing confusion and conflicting instructions that hold up distributions and business operations.
Make sure the purpose of each entity and account is documented in one place, along with how the assets will flow in the event of your death. Review this document regularly with your financial team, spouse, and executor to ensure everyone is on the same page and to catch any tax or other regulatory changes that may affect the plan.
Take a methodical approach.
The most important thing to recognize throughout this process is that it doesn't all have to be done at once. If you start with a high level plan of what you want to accomplish, your team can put together the steps necessary to achieve it, one piece at a time.
Most decisions are not irrevocable, and documents can be changed as circumstances develop in the future.
The important thing is to start somewhere and view the process as an ongoing project that will, with the guidance of your wealth management adviser, continue to improve over time.