Business Succession Planning and Personal Estate Planning

What Is the Difference, and Why Is Covering Both Aspects Important?

By Riaan Botha, Senior Trust Advisor

Running a business on your own can be difficult, let alone a family business. Like any business, running a family business has its rewards and challenges. Globally, between 60-80 per cent of all businesses are family owned, and succession plans are critical to the sustainability of the business. Still, only about 34 per cent of small business owners have a succession plan in place, according to PwC's 2021 U.S. Family Business Survey.

Not having a formalized succession plan in place might have a ripple effect on the individual as well as the family’s estate planning. One of the biggest misconceptions is that estate planning and succession planning are one and the same.

Business succession planning is the process of preparing for the transfer of ownership and control of a business from one generation to the next. It involves creating a plan to ensure the business remains viable, sustainable and profitable while at the same time preserving its assets, values and legacy. This can include developing strategies for transferring management responsibilities, identifying potential successors, establishing ownership and inheritance plans, and addressing financial and tax considerations.

Business succession planning entails various personal and emotional decisions the business owner(s) should make. But for this reason, even the most successful business owners find succession planning more difficult than other critical business decisions.

Here are a few essential questions to consider when developing your succession plan:

• Who do you want to take over the leadership of the business? A key part of succession planning is identifying and developing new leaders to run the business. Do you envisage your children or other family members taking over the company’s leadership? Do they have the skills to take over, and do they even want to be involved in the business? If your next generation plans to sell their stake, it is better to account for that in advance.
• Should the business be sold to provide liquidity for future financial security? Owners may want to sell their interest to provide for a spouse or other family members. Talk to your financial advisor and accountant to look at possible exit strategies such as buy-sell, life and disability insurance. You will need to determine the value of the business. Because business conditions change constantly, a succession plan can include a valuation formula based on revenue, profit, capitalization and other factors.
• Will you be depending on continuing income? A spouse who depends on your earnings from the business may now be left with an ownership interest that provides no direct income and is difficult to sell. Other business partners may have goals that do not align with your desire to provide for your family.
• Are you ready for the unexpected? Death, disability, divorce, disaster and disagreements among stakeholders need to be addressed effectively in succession planning. Many of these uncertainties can be anticipated and addressed in an operating agreement among business principals.

Absence of comprehensive succession planning can result in:

• Unclear direction for the business;
• Loss of employee faith in company leadership; and
• Family conflict over disagreements in the control and the management of a family business.

Estate planning refers to all the assets in an individual’s estate, including any ownership interests in a business. It involves preparing a plan on how these assets need to be administered in line with your wishes after you pass on or become incapacitated. Typically, this will be addressed in the person’s last will and testament as well as power of attorney for property or power of attorney for personal care. Estate planning might also include the establishment of either a testamentary trust or an inter vivos trust.

As part of estate planning, important questions a business owner should consider are:

• What are the potential tax exposure on both personal and business assets?
• Is there sufficient liquidity in your estate to cover death expenses?
• Does your financial plan include all decisions taken in terms of your estate plan and your business succession plan?
• Should you consider implementing dual wills to reduce probate costs?
• Should you be incapacitated, does your attorney for property have the knowledge to make the correct business decisions?
• Are there estate equalization aspects that need to be addressed because the business is only left to children who are involved in the business? In this case, the plan must provide how the uninvolved children will receive their “share” of the estate.
• Have you explored charitable giving as a means to reducing taxes payable on death?

Absence of comprehensive estate planning can result in:

• Unforeseen tax liabilities;
• Delay in distribution of assets and settlement of the estate;
• Potential litigation costs associated with the disagreements among family members; and
• Payment of probate costs that could have been avoided.

Business succession planning should solidify the continuity structure for your business, whatever your wishes may be. Estate planning, on the other hand, allows the opportunity to carry out your wishes for all your assets (business and otherwise) during your lifetime, during a period of incapacity and after your death.

Given the complexity of running a business and ensuring your own personal affairs are in order, conversations about ownership, wealth and responsibility of the family and key business employees could be uncomfortable and can lead to disagreements within the family and/or owners. Without consideration of a complete plan that includes both a succession plan for the business and an estate plan, serious financial and emotional consequences can affect your family business.

The FiTT team is here to help you with this process. Ask your Raymond James Advisor if you qualify for a review by our team of experts.

Statistics and factual data and other information are from sources RJL believes to be reliable but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities nor is it meant to replace legal, accounting, taxation or other professional advice. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. The information is furnished on the basis and understanding that RJL is to be under no liability whatsoever in respect thereof. This is intended for distribution only in those jurisdictions where RJL and the author are registered. Securities-related products and services are offered through Raymond James Ltd., Member - Canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Ltd. (“RJFP”), a subsidiary of Raymond James Ltd., which is not a Member - Canadian Investor Protection Fund. When providing life insurance products, Financial Advisors are acting as Insurance Representatives of RJFP. Raymond James Trust Services are offered by Raymond James Trust (Canada) in the provinces of British Columbia, Alberta, Saskatchewan, and Ontario, and by Raymond James Trust (Québec) Ltd. in the province of Québec. Trust Services are not covered by the Canadian Investor Protection Fund. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters.