According to the Family Business Alliance, family businesses make up approximately 80% to 90% of all businesses in North America, with 5.5 million family-owned businesses operating in the United States. Given the prominence of family businesses in the United States, it is not surprising that people frequently confuse estate planning with business succession planning, assuming that these two forms of planning are the same. While they may be connected, they are not the same.
Simply put, estate planning refers to the process of preparing to transfer assets after death while business succession planning focuses on ensuring the continuity of a business. If you have questions about the differences between estate planning vs. business succession planning or seeking legal guidance on drawing up legal documents related to either of these circumstances, consider reaching out to the experienced estate planning and business succession planning attorneys at Harrison Law, PLLC. Harrison Law, PLLC prioritizes providing clients with personalized services and works with clients across the globe. You can reach our legal team today at (480) 320 – 2310.
Understanding Estate Planning
Less than half of all U.S adults engage in estate planning, and not even half of Americans have a Last Will and Testament (will). This lack of estate planning among United States adults is concerning, as it can have serious consequences such as unforeseen estate tax liability, probate court costs, a delay in distribution of assets, and even lead to serious disagreements among living family members that can result in litigation. Estate planning vs. business succession planning require different considerations. Some of the key questions that you should ask when planning your estate include:
- What comprises my assets? Who are my intended beneficiaries of my assets after I pass?
- What do I consider as financial security and are my current assets below or above that amount?
- Is there a way that I can limit tax liability for my beneficiaries?
- Do I have any investments and insurance portfolios or retirement funds that I need to consider?
- Have I considered health care directives and plans for my funeral costs?
Certain documents are associated with estate planning. Some key estate planning documents include:
- Living trust
- Will
- Powers of attorney for both finances and healthcare
- Beneficiary designations
- Advance healthcare directive
It is important to remember that estate planning determines who inherits property after a person’s death and, in some cases, especially when it comes to family businesses, a business is part of that property. However, while estate planning may decide who inherits the business, it will not determine how the business continues after the owner’s death. This is where business succession planning comes in.
Understanding Business Succession Planning
What differentiates estate planning vs business succession planning is that business succession planning focuses specifically on the continuity of a business. Some of the key considerations that business succession planning covers include:
- Whether the business should be sold or passed down to family members or heirs.
- Determining the key leadership positions and skills that are necessary for the business’s success.
- The preparation, training, and support of successors.
- The vision for the business.
- What happens if key business members have a major medical event and may be unable to return for a significant period of time.
- The viability of the business’s continuity under the successors.
- When the business will be transferred – in some cases it may be optimal to transfer business control before death.
If you are considering handing over your business while still alive but are not yet ready to give up full control, there are certain strategies that family business owners can employ. These include:
- Transferring ownership to the next generation through nonvoting stock.
- Placing business interests in a trust or family-limited partnership. This will allow the owner to transfer ownership interests to successors while still maintaining management control.
- Establishing an ownership plan for employees.
Similar to estate planning, a failure to plan for business succession can have serious consequences such as:
- Leaving behind a business with no direction or established leader.
- Disheartened employees in the company and low morale due to lack of direction and organization.
- Power struggles within the business due to undefined leadership.
- Internal family struggles due to no direction about who is the correct successor for the business.
- A loss in value if surviving shareholders/owners decide to sell the business.
Creating a strong business succession plan may seem daunting, which is why it may be helpful to seek experienced legal help such as through the seasoned attorneys at Harrison Law, PLLC.
The Connections Between Estate Planning and Business Succession Planning
When it comes to estate planning vs. business succession planning, in some circumstances, the two may be intertwined, especially when it comes to family or small businesses. In these scenarios, you may have to consider how to divide the ownership of the business among your beneficiaries, as well as who in the family is appropriate to assume key roles in business operations. In these cases, there are certain common scenarios that often play out:
- Heirs take over and control the company. Without a strong succession plan, this can sometimes mean decreased revenues as the new successors learn how to run the business.
- Heirs sell the business, which is often sold at a decreased value.
- In situations where there are co-owners, the business may still be passed via estate plan to the heirs, but the co-owners carry on the business.
- The co-owners buy the business from the heirs.
In each of these situations, a strong business succession plan is a must to ensure a smooth transition that enables the continuity of the business.
How an Experienced Estate Planning and Business Succession Lawyer Can Help
It can be overwhelming to try and navigate estate planning vs. business succession planning, which is why it may be helpful to reach out to an experienced attorney for legal guidance. At Harrison Law, PLLC, knowledgeable Arizona estate planning attorneys with years of experience in trust, estate, and business planning law will work closely with you to ensure that the transfer of assets, including business ownership, goes as smoothly as possible. Reach out to us today at (480) 320 – 2310.
© 2022 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved
This website and article have been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal or financial advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.
