What the difference between an estate plan and a succession plan?
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If you don’t deal with them on a regular basis, you’d be forgiven for thinking that an estate plan and a succession plan are the same things. Although each plan puts in place recommended and intended steps for the future, they both deal with separate albeit equally important issues with different outcomes.
What are estate and succession plans and why do people confuse the two?
An estate plan deals with the way a person’s assets will be distributed after they pass away or if they are otherwise incapacitated, whereas a succession plan only covers the plan for the family business or enterprise at such time the current owner dies or is no longer able to run the business. As such, a succession plan forms part of an estate plan, but an estate plan will not be part of a succession plan. Therefore, it is important for business owners to have separate plans which deal with their business and their estate as a whole.
People often conflate the two plans because traditionally it was more common for the business owner to leave their business to their child/ren in their will. As such, the estate plan and succession plan were more intrinsically linked. This is becoming less common and as younger generations plan to sell their family business and retire earlier, standalone succession plans are becoming more important. With fewer family business owners moving away from the concept of bequeathing the business to an ‘heir,’ it is essential for all concerned to be aware of how the sale of the business is dealt with separately to the remainder of the business owner’s estate.
What is included in estate plans and succession plans?
Estate plans typically include:
- a will and any associated trust/s and the named beneficiaries;
- an overview of all assets making up the estate;
- Power of Attorney documents; and
- if relevant, a life insurance policy.
Conversely, a succession plan should comprise:
- either the proposed successor for the business or plan for the sale of the business;
- an independent valuation of the business;
- a shareholder agreement or buy-sell agreement to deal with the transfer of shares and related financial details; and
- life insurance covering the director or owner of the business (typically known as ‘key person insurance’).
Do estate plans and succession plans double up on the same issues?
For all their differences, estate plans and succession plans do have some crossover. For example, a life insurance policy from the estate plan may be a crucial financing element of the buy-sell agreement and may also have tax deferral benefits.
There may be correlations between a family trust in the estate plan and tax liabilities for the business successor, depending on whether the trust is subject to an estate freeze. These implications will be unique to each plan and should be discussed with an estate planning lawyer and a tax advisor so they are clear and understood by the relevant parties.
Anyone in the process of planning a business succession should ensure the priorities of the estate plan align and those undertaking estate planning should ensure a well-executed and legally binding succession plan exists separately for the business succession.
If you are a business owner who wants to ensure a succession plan is in place for your business or you want to update an existing succession plan, our wills and estates team can prepare the plan and help you understand how it can be dealt with alongside your estate plan.