As a business owner, you’ve likely poured not only your time and energy into building your company but also your personal assets. Being deeply invested makes the future of your business, along with your and your heirs’ future, all the more important to protect. While your eventual exit may feel far off, beginning succession and estate planning now is crucial, especially when considering the unexpected, such as a death or incapacity. We’ve experienced the valuable lessons of a successful succession from CCMI’s founders firsthand, giving us unique insights to share with other business owners. We’ll explain the relationship between a succession plan and an estate plan, why early planning is key, and how to protect your and your heirs’ assets.
What’s the Difference Between Estate Planning and Succession Planning?
While closely linked, estate planning and succession serve unique purposes, with distinct benefits and implications for business owners to consider.
What is estate planning for business owners?
Estate planning for business owners involves more than distributing personal assets; it also aims to minimize taxes, maximize value, and ensure a smooth transition. In addition to healthcare directives and other instructions to carry out your wishes, an attorney and financial advisor can help you devise a plan that includes key aspects related to your business, such as:
- Succession planning: Identifying heirs or successors to continue your business
- Tax planning: Minimizing estate taxes through strategies like gifting and complex trusts
- Asset protection: Strategically structuring your assets and ownership to protect your personal wealth
What is succession planning for business owners?
Succession planning involves transferring leadership or ownership of a business either to the next generation, a trusted partner, or an external buyer. It also involves evaluating various business exit strategies, each with its own considerations and opportunities. From evaluating external buyers to identifying potential internal successors, a professional can help you explore your options to determine the best path forward.
Within estate planning, succession planning plays a critical role in the continuity of your company in the event of your death or incapacity. It outlines the transfer of ownership, control, or leadership, ensuring the business continues in your absence.
Why is an Estate Plan and Succession Plan Important for Business Owners?
An estate plan is essential for business owners to ensure the protection and seamless transfer of assets. By incorporating a detailed succession plan within your estate plan, you can provide an orderly and private transfer of ownership and control of a business — according to your wishes — in the event of your death or incapacity. Even if you have a well-written partnership agreement with co-owners, an estate plan can help preserve and properly distribute your shares to your heirs upon your passing. This minimizes ambiguity about business ownership or a potential sale after your death.
Additionally, many business owners have significant personal wealth tied up in their business, which could expose them or their heirs to unnecessary risks. An all-encompassing succession plan facilitates a smooth transition of leadership, safeguards your personal finances, and protects your business’s continuity and legacy.
How Soon Should Business Owners Make an Estate Plan?
Business owners should include their business in their estate plan when it has intrinsic value, such as consistent revenue, substantial assets, buyer offers, and customer interest. This is also critical as their business generates more of their personal net worth.
The earlier you include your business in your estate plan, the more strategies you have to protect your personal wealth and reduce tax liabilities. For example, some companies can rapidly increase in value, making certain estate planning strategies more challenging, such as gifting to complex trusts. Additionally, higher valuations can lead to greater estate tax exposure, making it essential to act early to preserve more wealth for your heirs.
Similarly, succession planning should begin early in your business journey, or at least five years before your planned exit.
What are the Risks of Lacking an Estate Plan or Succession Plan?
Lacking estate and succession plans can expose your heirs and business to significant financial and tax risks:
- Missed Tax Opportunities: You may miss key tax-saving opportunities that could allow you to pass more value to your heirs. For example, many family businesses face the decision to sell the company to the next generation or hold it until death to let it pass through the estate. Each option has different tax implications. An estate plan can address these types of scenarios to reduce tax burden and optimize how much you transfer.
- Family Conflict: The absence of an estate plan can lead to confusion, stress, and potential conflicts, forcing your family to make difficult decisions on your behalf. A well-defined estate plan can help prevent these issues and facilitate proactive family conversations, leaving little ambiguity about how the business should be owned or possibly sold after your death. Additionally, placing the business title in a trust ensures the trustee follows the owner’s wishes explicitly, reducing the risk of outside influences.
- Inequitable Distribution of Ownership: Choosing the next generation of owners is critical not only for the operation of the business but also to ensure fairness among heirs. For example, if only some heirs are involved in the business, how do you compensate them compared to those who aren’t? An estate plan can specify the equitable distribution of ownership and control, factoring in the entire family estate so each heir receives appropriate assets while allowing the business to continue operating smoothly.
Why are Trusts Important in Estate Planning for Business Owners?
Trusts — legal agreements in which a trustee manages and distributes assets to beneficiaries — can play a critical role in estate planning for business owners.
- Protecting Personal Assets: Placing your business shares in a trust can help ensure a smooth transfer to your heirs and help secure the value of your business for your family.
- Privacy: Trusts allow private asset transfer according to your wishes. They may also bypass probate, which could help your family avoid a costly, time-consuming, and public process.
- Tax Benefits: Trusts can offer tax advantages to help business owners reduce estate tax and use strategies such as gifting shares.
A lawyer and financial advisor can help ensure your business is properly structured in a trust, preserving more wealth for your family and ensuring business continuity in your absence.
How Can Business Owners Protect Personal Assets in Succession?
Protecting your personal assets during succession requires thoughtful estate and financial planning. While estate planning is more focused on the transfer of ownership and protecting personal assets, financial planning helps inform business owners about how to maximize business value or how much income or sale proceeds they need to reach their family’s goals. Here are ways to protect your personal assets during a succession:
- Keep Business and Personal Assets Separate: Separating your personal and business assets through clearly defined ownership structures or trusts can help reduce liability risks and disputes, avoid complications during succession, and protect your wealth.
- Plan for Transfers of Ownership: A detailed estate plan should outline how the business will transfer to the next generation or new owners, consider your family’s financial needs, and ensure appropriate income or sales proceeds meet those needs.
- Implement Asset Protection Strategies: Methods such as trusts can help shield your personal assets from business-related risks or succession challenges, such as potential legal and tax issues.
Estate and Succession Planning for Business Owners: How CCMI Can Help
At CCMI, we understand the unique challenges that come with owning and managing a business. As entrepreneurs ourselves, we’re equipped to guide you through integrating your business’s value with your personal and professional plans. Our goal is to help you navigate succession and estate planning while safeguarding your wishes and future goals. Here are additional ways we can assist:
- Tax Optimization: We design tax-advantaged action plans to meet your goals of maximizing what you keep and minimizing your tax liability.
- Retirement Planning: We customize retirement plans for business owners that align with your goals and business’s value.
- Insurance Solutions: We help manage your evolving insurance needs as your assets grow for adequate coverage and protection.
- Professional Collaboration: Alongside your team of advisors and professionals, we help draft succession, estate, and business continuity plans that will ensure your safety net is in place.
Learn more about how we help business owners throughout their financial journey, guiding them on a path toward financial independence.
CCMI provides personalized fee-only financial planning and investment management services to business owners, professionals, individuals and families in San Diego and throughout the country. CCMI has a team of CERTIFIED FINANCIAL PLANNERTM professionals who act as fiduciaries, which means our clients’ interests always come first.
How can we help you?
