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The Importance of a Succession Plan Within Your Estate Plan - Werner Law

The Importance of a Succession Plan Within Your Estate Plan

Troy Werner and his family

Written by Troy Werner

Troy Werner has been an indispensable asset to The Werner Law Firm since joining in 2009, providing exceptional legal service to its clients.

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POSTED ON: March 31, 2022

There comes a time when it is prudent to think about life after death. Not necessarily in a philosophical or theological sense, but in a logistical one. We each have tangible and intangible things attached to our name, whether it is a bank account, a boat, a home, an investment property, or a business. These […]

There comes a time when it is prudent to think about life after death. Not necessarily in a philosophical or theological sense, but in a logistical one. We each have tangible and intangible things attached to our name, whether it is a bank account, a boat, a home, an investment property, or a business. These things cannot follow us into the grave.

Arranging for these things to be sold and/or distributed after death is one of the primary tasks of an estate plan. But what about the business? That’s where a succession plan comes into play.

If you own a business, it is important to note that both estate plans and succession plans are very much intertwined and must often be coordinated. For example, if you choose to sell the business as part of your succession plan, the proceeds of the sale (or your shares being bought out of the company) go towards the estate plan.

A carefully crafted estate plan written without consideration for the sale of the company might lose its estate tax-free status, meaning a considerable chunk of the profits from the sale would be spent paying Uncle Sam.

That is just one circumstance. Succession planning and estate planning are two sides of the same coin, and both are equally important for business owners.

What is an Estate Plan?

An estate plan is comprised of a series of documents outlining what must be done with your estate, i.e., your earthly possessions. An estate is anything owned and left behind in death, from proceeds and royalties for artistic endeavors, to financial instruments such as bonds and securities, bank accounts, life insurance pay-outs, retirement account remainders, properties, and valuables.

There’s more to creating an estate plan than writing on a piece of paper that everything is to be sold and distributed equally among your spouse and children. In addition to properly legitimizing a document like a will with signatures, witnesses, and a notary, some portions of the estate are distributed differently from others.

A life insurance pay-out can be made out to a designated beneficiary and paid out immediately after death, bypassing probate, and other will-related red tape. Instead of a one-time pay-out, an estate can be structured to develop and manage a family fortune for future generations, through the services of a professional trustee. Then, there are considerations between life and death – such as how to manage both financial and healthcare decisions while incapacitated.

Estate plans should aim to answer questions such as:

  • Who gets what? How will the estate be distributed?
  • Will the estate be distributed equally?
  • What parts of the estate will be distributed via will? Via trust? Via beneficiary designation?
  • Who will receive guardianship over your minor children?
  • What will happen to your debts? How will your creditors affect the estate plan?
  • Who will take care of any major financial obligations while you are alive yet incapacitated?
  • Who will oversee your medical decision making if you are alive yet incapacitated?
  • How will your estate plan address anticipated sibling rivalries and family disputes?
  • How do you justify and explain your decision making process when deciding who gets what?
  • How can your estate planning be used to bring the family closer together, rather than do the opposite?

What is a Succession Plan?

A succession plan determines who takes the wheel when the captain must invariably leave the ship. Some succession plans stop short of naming a new head of the company by instead providing guidance for the transition period between you leaving, and someone else taking charge.

Unlike estate plans, which generally go into motion upon your death, succession plans are not necessarily related to you passing. They are also relevant in preparing for retirement, moving on to a new phase in your life (such as public office), or simply when leaving the company to take on a different position elsewhere, such as being part of a partnership in a new and exciting business endeavor.

Succession plans should aim to answer questions like:

  • How will the transition in leadership be handled?
  • Who will be in charge after you leave?
  • Will there be any changes in management?
  • Will there be any other staffing changes?
  • Who else is leaving with you?
  • Will there be changes in the company’s mission and vision, or plans for the future?
  • Is the business going to be sold instead, and if so, to whom?
  • If sold, will the business continue to operate as planned or will there be cutbacks?
  • Will the business be disassembled? Will workers and management continue to have their jobs?
  • If sold, what are the tax implications for your estate, as the owner of the company? How will you adjust your estate plan to compensate for the influx in wealth as a result of the sale?

What Does an Estate Plan Look Like?

An estate plan must account for every aspect of your estate. That means the estate plan is as large and complicated as your estate.

You could manage all your affairs in a single will and create a simple power of attorney to account for incapacity.

Or you may require an estate plan that deploys trusts to reduce tax liability, shelter certain assets from creditors, and accounts for foreign assets. Some of the more common elements of an estate plan include:

  • Last will and testament.
  • A living trust.
  • A power of attorney.
  • An advance directive.

What Does a Succession Plan Look Like?

Succession plans are less formal than estate plans. While an estate plan requires notarized documents and careful legal language, a succession plan could be an internal document kept safe by the vice president of the company or someone else in management, or a set of documents kept in a folder in your office, mentioned in a will. Some of the things you might want to do in preparation for a succession plan include:

  • Grooming the next person in position for leadership.
  • Developing a step-by-step plan of action for management after you leave.
  • Looking into potential buyers for a sale.
  • Determining who is best equipped within the family to carry on a family business.
  • Consult a tax advisor or attorney about the tax implications of a sale, and of your death/incapacity.
  • Figuring out how to distribute the proceeds from the sale upon your death.

The Consequences of Ignoring Planning

If you own a business, you must not ignore your responsibility to plan for an unexpected end to your leadership. Even if you don’t plan to retire anytime soon, you should account for premature death and incapacity. What happens if you don’t come to work tomorrow? Who’s in charge, and what should be done?

It can be difficult and frightening to think about life after your own passing. But it’s also important to think about the grief and stress you can prevent with a little bit of planning. Talk to your attorney or an experienced law firm about estate and succession planning today.


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