How is Estate Planning Connected With Succession Planning

Accumulating wealth and building a business can take years of rigorous hard work. Hence, taking concrete steps to safeguard your wealth and business from the changing times, evolving laws, and the notions and conflicts of future generations, is imperative. Over the years, the importance of estate and succession planning has come to the forefront. According to a survey by Caring.com, 35-54-year-olds are less likely to have an estate planning document in place. In this age group, the number of people who have a will dropped from 37% in 2019 to 22.5% in 2021. This registers a decline of 39%. The age group above 55 also recorded a decline of 27%, from 60% in 2019 to 44% in 2021, in estate planning documents. However, the percentage of younger adults, between the ages of 18 and 34, with a will or another estate plan has increased by 63% since 2020.

That said, succession planning is another sphere that lacks attention. Despite realizing that succession planning is critical, only a few orchestrate it well. Succession planning can be difficult to discuss for even the most successful business owners. It may help to consult with a professional financial advisor to help understand the intricacies of both processes to create a comprehensive estate plan and solid succession strategy. People also often overlook succession planning or club it together with estate planning. While both are vital for legacy protection, they are two separate yet intertwined concepts that drastically impact each other.

The more carefully you plan and undertake these processes, the more peace of mind you have regarding yourself and your family’s future.

Here is what you should know about estate planning and succession planning, and how one is connected with the other:

Table of Contents

What is estate planning?

Estate planning involves determining how your assets will be conserved, managed, and distributed in case of your death or financial incapacitation. Estate planning is not only for the rich. It is for everyone who owns an estate. Your estate is inclusive of your car, home, real estate, savings accounts, retirement accounts, furniture, personal possessions, life insurance, and more. No matter how modest or large, estate planning is crucial for all.

The following are some key estate planning documents that you should create:

Will
Living trust
Durable powers of attorney for finances and health care
Beneficiary designations

Typically, estate planning is inclusive of tasks such as making a will, setting up a trust, making charitable donations, naming an executor, listing beneficiaries, giving gifts during a lifetime, and most importantly, planning for family business succession.

Besides, here are a few questions you should try to answer with a holistic estate plan:

What are the different types of assets you own? What is their potential estate tax exposure?
How much do you need to secure your financial future in case of your incapacitation? Is your current wealth adequate or short for the same?
Do you own any retirement accounts, insurance, or investment portfolios? Have you assigned beneficiaries for the same? Can these assets be used to pay your estate tax liabilities?
Have you reserved directives for your long-term care, funeral costs, healthcare as well as distribution of assets?

What is succession planning?

Succession planning is an integral part of estate planning. A good estate plan requires you to comprehensively plan for your business to ensure its success even in case of your death or financial incapacitation. Succession planning involves creating a detailed strategy for passing on the leadership of your business (often a company). You can choose to pass on the reigns to your heirs, spouse, employees, or a group of employees. This process is also known as replacement planning.

Succession planning ensures that your business continues to run smoothly even in case of your death or incapacitation. A good succession plan also specifies the plan to be adopted when the most important people of the company retire, die, or quit the company to pursue better opportunities. The ultimate objective of succession planning is to ensure the business is not affected due to a loss of leadership or top stakeholders.

However, succession planning is not a one-time event, it is a complete process. It involves identifying potential replacements (both within and outside the company), evaluating their skills, and preparing them to succeed in the business as planned.

Ideally, when drafting a succession plan strategy, you should take into account the following questions:

Is your business viable for the next generation? If yes, do you have a family member who can resume business operations on your behalf?
What are the viewpoints of the potential successors? How does their vision align with the business’s core principles?
Do you have any other family members who are interested in the business?
Should you sell the business and liquidate funds to provide future security to your family?
If the business is not sold, who would finally take over the command? Is the person qualified and adequately trained to do so? If not, it is possible to equip them for the position?

When you create a succession plan after keeping in mind these aspects, you are likely to be more effective in your approach.

Many times, estate and succession planning are used interchangeably. However, on a more technical front, estate planning is a broader concept than succession planning, and the latter is an integral part of the former. Estate planning refers to your assets, including any ownership interest you might have in a business or company. On the other hand, succession planning directly relates to the actual business and planning for its unhampered continuity in the event of the absence of key leaders. Succession planning requires you to create a structure so that your business runs smoothly even after you are gone or incapable of managing it on your own. As a part of this process, you are required to plan for the next-in-line successor and handing down the reigns of the business to your desired candidate.

Every generational transition in succession planning results in a significant change in wealth and distribution of assets. Thus, it becomes highly critical to consider succession planning a separate process that requires deep precision and focuses on planning. However, in the general sense, it is a vital constituent of estate planning. When you create an estate plan, you must explicitly plan for the succession of your business and undertake the detailed process to make sure it is adequately done.

The documents you use for estate and succession planning will likely be the same, with specific details of the succession aspect. You can use a will to lay down complete directives of your estate and succession plan. Alternatively, you could rely on family constitution and governance, charitable meanderings, gift deeds, beneficiary designations, life insurances, and other commonly followed mediums of inheritance planning. Along with this, you can utilize contemporary mechanisms like creating a trust to draft a holistic end-to-end estate and succession planning.

If you own a business, both types of planning – estate and succession – are necessary to help you streamline the smooth transfer of your assets, protect family harmony, and ultimately protect the legacy and business you have worked so hard to build. A professional financial advisor can help you to build a holistic estate plan with a comprehensive succession strategy as per your needs.

How is succession planning different

Estate planning involves preparing for the effective transfer of your assets after your death, or the management of those assets in case of your incapacitation. Proper estate planning will ensure that the estate, inclusive of all assets, is managed well and eventually transferred as per your wishes.

However, in contrast, succession planning only focuses on the totality and transfer of your business and its related assets. This is a strategic tool to smoothly manage the transition operation and pass on the management and ownership of the business to the desired nominees, partners, or future generations.

Typically, succession planning is narrower than estate planning but is a wide concept in itself. It includes the following considerations:

Assessing leadership positions and qualities required for the success of the business.
Training and preparing leaders within the organization.
Analyzing the future need of the business.
Establishing a future vision for the business.
Evaluating the viability of the business in the hands of the future generations or desired successor.

As the owner of a business, it is advisable to assess if your nominee or future generations are equipped, interested, and willing to successfully take over your company. As a part of succession planning, you can also liquidate your business and lay down the directives for it. You can do this in case you do not want to pass on the business reigns to anyone and would like to dissolve the company.

You would also need to create a buy/sell component as a part of your succession plan. This is even more relevant when your business is operated with a partner. The buy/sell agreement is a pre-arrangement where the business interest is sold in case of a triggering event like the death of the business owner, the retirement of key personnel, and more.

Why are estate and succession planning important during these times

Unfortunately, you cannot predict how long you will live or how healthy you will be at a later stage in your life. Moreover, illnesses and accidents can occur at any age. However, it is possible to optimally plan for such unfortunate events and protect your family and your business even after you are gone. With a fool-proof estate and succession plan, you can ensure that your children and family are financially protected, your assets are distributed as per your desires, your financial security is guaranteed in case of your incapacitation, your business runs smoothly, and your legacy is carried forward.

Specifically, business succession planning helps to congeal the continuity structure for your business, as per your desires. Alternatively, estate planning allows you to execute your wishes with regards to your assets (business and otherwise) management and distribution, during your lifetime, in case of incapacity, and even after your demise.

Four reasons why estate planning is crucial:

An estate plan helps to protect your beneficiaries.
An estate plan safeguards young or minor children.
A comprehensive estate plan helps to reduce the estate tax burden for the heirs.
A well-drafted and explicit estate plan helps to avoid any family feuds or legal hassles, including probate by the court.

Lack of an estate plan results in:

Unexpected estate tax liability for you and your family.
Probate and legal issues, including overly high costs.
Delay in the distribution of assets as per your desires.
High litigation costs due to disagreements over estate distribution among family members.

Three reasons why succession planning is essential:

A solid succession plan helps you preserve your legacy.
A carefully created succession plan ensures the business runs smoothly even in your absence and is protected from large, unexpected tax liabilities.
A succession plan will help avoid probate.

Lack of a succession plan results in:

No clear direction for the business in case of your absence.
Loss of employee faith because of loss of leadership and direction.
Power struggles amidst the middle and lower management.
Disagreements in the family over business.
Possible losses in business due to lack of ownership, especially when surviving shareholders sell the business.

Moreover, if you own assets but cannot conduct business because of your mental or physical incapacity, then a person appointed by the court will be assigned the authority to sign on your behalf. The court will supervise and also ultimately control the use, distribution, and management of your assets. This can be expensive, time-consuming, and difficult to end even when you recover. Further, if you die without a valid succession or estate plan, all assets in your name that do not have a defined beneficiary will be distributed as per your state’s laws through court-supervised probate. This means your assets will not be distributed as per your wishes.

To sum it up

Both estate and succession planning are an integral part of your financial security. The absence of these important strategies can give rise to several complications and legal issues. Hence, to navigate complex issues, it is important to create a proper estate and succession plan. You can use WiserAdvisor’s free tool to get matched with a vetted professional financial advisor to help you understand the intricacies of both processes, and ultimately create a comprehensive estate plan and solid succession strategy for peace of mind and protection of your legacy.