Most Estate Plans Ignore Critical Succession Issue


One of the themes of my work with clients is to consider how thinking and practices that lead to success (or failure) in the business world can produce similar results when applied to matters of personal finance.

web-axstj-estateplanningworksheetimg_3690-1013-1968.jpgThis month’s column addresses one of the greatest challenges involved in managing personal and business assets – the process of transferring accumulated holdings to others.  In personal finance, this process is called estate planning.  In business, it is called succession planning.

Though there are similarities in the way people design their estate and business succession plans, there is one essential component of business succession planning that is often ignored in estate planning – attention to the skills and knowledge of subsequent owners.

Below, I suggest that by building this basic tactic of business succession planning into their estate plans, even those who do not own a business can make sure that hard-earned assets continue to produce value for generations to come.

But first, a quick review of the fundamental similarities between most business succession and estate plans.

All business succession plans and estate plans reflect the owner’s intentions regarding future owners.  Business succession plans must address whether businesses will be conveyed to children, employees, or an outside party, while estate plans specify whether family wealth is left to family members outright, to trustees for the benefit of family members, to charities, or (rarely) to other individuals.

Similarly, most sophisticated business succession and estate plans are structured to minimize taxes owed when such transfers are made.   Typically, this involves an alphabet soup of sophisticated planning techniques.  Business succession plans need to consider structures like ESOPs, FLPs, LLCs, and S elections, while estate plans will often consider such techniques as A-B trusts, CLUTs, CRATs, and GRATs.  You don’t need to know what these acronyms mean – but if you have a successful business and/or accumulated much wealth, you want to make sure your lawyer does.

However, while professionally-crafted business succession and estate plans share the tax and transfer concerns described above, estate plans typically ignore a matter that most business succession plans focus on – the competence of subsequent owners to sustain and grow the value of what has been built.

To advance their business succession goals, business owners often involve their teenage and young adult children in the business, and help their children acquire the competence needed to lead the business later in life.  Business owners who want to sell their business to non-family members invest significant time and money in developing the capacity of employees to take over the company and/or building relationships with outside buyers able to sustain and grow the company’s value.

Estate plans, on the other hand, rarely include strategies to help subsequent owners of family assets develop the competence to manage the holdings they will inherit later in life.  While children of business owners often grow up surrounded by the day-to-day realities of managing a business, children who inherit portfolios of cash, stocks and bonds typically are only minimally involved, even as young adults, in managing family assets.

Similarly, though adult children of business owners are typically encouraged to learn about the family enterprise, our cultural common sense is that it is inappropriate for children to inquire about their parents’ financial situation – much less to ask how their parents plan to manage the distribution of their assets to subsequent generations.  As a result, most young adults know too little about their parents’ assets or estate plans to use that information when planning their careers and lives.

However, just as there is no single way to prepare an adult child or employee to implement a business succession plan, there is no ‘right” to help adult children develop the knowledge and skills they need to take care of assets received pursuant to their parents’ estate plan.

One commonality is that it takes decades to be done well.  The ideal estate plan should include tactics that gradually help children acquire the competence needed to manage the wealth they will receive from their parents.  As with the aspiring family business owner, the more competence and maturity demonstrated by the estate plan beneficiary, the more information and assets provided.

My experience is that almost all parents aspire to help their children succeed financially as part of our larger hopes for their personal success.   Whether or not we own a business, when we plan not only to transfer assets to our children but also to help them develop the skills and knowledge it takes to manage those assets, we take a major step in realizing that aspiration.