Guiding Clients Through Estate Planning and Business Succession
When thinking about preserving wealth for future generations, many may think first of estate planning. However, there’s another measure that can help protect a person’s financial success: business succession planning.
Estate planning and business succession planning go hand-in-hand for clients who own businesses. And financial advisors contribute significantly to planning for the future and preserving a business owner’s legacy. Asset-Map’s tools aid financial planners in visually displaying a client’s financial picture, assisting in creating a plan that ultimately benefits all involved parties.
In this article, we will address the role of a financial advisor in facilitating both estate planning and business succession planning to ensure seamless transitions for clients and how using Asset-Map can streamline the process.
The Essentials of Estate Planning for Business Owners
Estate planning consists of several facets to prepare for a person’s eventual passing or an unexpected incapacity. A financial planner can assist in preparing the necessary documents and taking inventory of their client’s assets for distribution.
Key components of estate planning for business owners include:
Will: A will expresses a client’s desires regarding how their property should be distributed after death. It also determines who will manage the property during the distribution process.
Life Insurance: Life insurance policies can serve as financial protection upon the insured person’s death. Beneficiaries can be paid either in regular payments or as a lump sum. Especially for business owners, life insurance can help cover expenses such as business debt, loss of income, or funding a buy-sell agreement.
Trust: A revocable living trust can be formed by putting a client’s assets into a trust and selecting a managing trustee. If the person falls ill, the designated trustee manages their assets. Upon the trust owner’s death, their assets will be transferred to the predetermined beneficiaries and bypass probate. Additionally, they can create a permanent, irrevocable trust that the owner cannot change.
Power of Attorney: A durable financial power of attorney allows a person to select a designated agent to act on their behalf if they are medically incapable. This person will act in their place in paying taxes, managing assets, etc. On the other hand, the person could choose to set up a limited power of attorney in which the designated agent is limited in their powers.
Medical Care Directive: A medical care directive, also known as a “living will,” explicitly shares a person’s desires for medical care if they are ever unable to make those decisions for themselves.
These critical components are essential for safeguarding a client’s business and personal assets.
Integrating Business Succession in Estate Plans
Business succession planning should be integrated into estate plans to create comprehensive preparations for protecting a business owner’s wishes and interests.
Understanding Business Succession
To integrate business succession into estate plans, you must first understand the basics of business succession. Business succession planning defines how a business’s assets, ownership, and duties will be divided upon the owner’s disability or passing.
Several succession strategies could come into play, including:
Family Succession: Family succession is a common practice for business owners. They may want to protect their family legacy and keep operations in their family’s name, which would include transferring ownership to a family member.
Sale: Business owners always have the option of selling their businesses to an outside party. If no one in the family or company executives shows interest in taking over the business, the owner may decide to sell the company to someone outside of their inner circle.
Management Buyouts: A management buyout happens when an internal or corporate executive decides to purchase a business from its owner. This generally occurs when the owner is preparing for retirement or is ready to sell or divest their interests in a business.
Planning for Transition
Planning for the transition into retirement can seem overwhelming. That’s where a financial advisor can help to clarify the process.
Creating a business succession plan includes:
Discussing plans with business partners or family members (if applicable)
Preparing your family for your eventual passing and choosing successors
Creating a buy-sell agreement
Deciding how to handle any disputes over business management
Determining how business assets, ownership, and duties will be distributed
Valuation for business succession planning is essential to ensure fairness for successors to family-owned businesses, help in retirement planning, and minimize tax liabilities. An advisor can help clients determine the best valuation method for a business. The three general methods used for valuing a business are:
Asset-based: This method uses a simple formula: Assets minus liabilities. This can be based on historical data (book value) or estimated liquidation value.
Income-based: This method uses future cash flow projections and discounts them to their current value with a set discount rate.
Market-based: This method uses the sale price of comparable businesses in the same industry to determine the value of one’s business.
Choosing successors is often a challenging task for business owners. They may have several children who each would make fantastic future business owners. Or, they may have no family members or loved ones interested in business ownership as a successor.
To choose successors, consider the options, their strengths and capabilities, and whether they’d be interested in a leadership role. Consider speaking with each potential successor to determine their level of interest in being a successor to ensure a smooth transition to the next generation.
Common Challenges in Estate Planning
Like most things in life, estate planning isn’t without its challenges. Typical obstacles business owners may face include valuation disputes, family dynamics, and tax implications. Let’s dive into how to effectively navigate these challenges.
Valuation Disputes
Valuation disputes can occur when stakeholders offer different opinions on a business's value. It’s important to consult an outside appraiser who can provide an objective valuation of a small business to manage valuation disputes.
Family Dynamics
Family members may disagree over who should be the successor and how an estate should be divided. These conflicts are widespread among people in estate and business succession planning. To effectively address this challenge, you must facilitate open communication among family members, and you may even want to bring in a third-party mediator to discuss ownership interests. A key first step is to document and map out the people who are impacted by the succession decision, including both family members and key employees and business partners, to help ensure that the business owner’s objectives will be understood and to proactively manage change to help ensure the successful transfer of the business.
Tax Implications
Business owners are subject to various taxes that may affect their estates' value and the financials of their heirs. They must navigate taxes such as capital gains taxes, estate taxes, gift taxes, and more. It is recommended that they work closely with a tax advisor or law firm to mitigate taxes and strategically manage an estate. Stay tax-efficient by keeping up with new and changing tax laws in your jurisdiction and asking for legal advice from tax professionals.
The Role of Financial Advisors in the Planning Process
Financial advisors are invaluable resources during the estate planning and business succession planning processes. These professionals are skilled in tactical and business planning to help their clients manage the distribution of their estate.
Facilitating Discussions and Decisions
One role financial advisors can play is helping clients clearly articulate their goals and expectations for estate outcomes and business continuity. Clear communication and regular estate reviews are important for clients to proactively manage their assets. Financial advisors are well-versed in decision-making and can provide guidance on how to divide an estate to ensure asset protection and minimize tax liabilities.
Coordinating with Other Professionals
To ensure comprehensive planning, financial planners can also help connect clients with other professionals, such as estate planning attorneys, accountants, and specialists. In most cases, financial advisors can coordinate meetings with other estate planning professionals. Advisors can act as the central point of coordination to integrate all aspects of planning together.
Leveraging Technology to Enhance Planning
In today’s modern era, financial advisors can leverage technology to enhance the planning process. Tools like Asset-Map can help visualize a client’s entire estate, organizing both business and personal interests, as well as ensuring that all of the key people, entities and causes in the business owner’s life are considered.
Ultimately, this technology helps to facilitate easier discussions and decision-making while minimizing unexpected outcomes. Using technology for documenting, tracking, and updating estate and succession plans ensures a client is covered in every area.
Asset-Map’s features, such as the Asset-Map Report, help clients visualize their household and business assets to make informed decisions on distribution. Additionally, the Stencils feature can be used to overlay peer data to accelerate conversations around estate planning documents and business succession, while the Drafts feature is valuable to help clarify the before-and-after of decision-making across stakeholders and accounts.
Empower Your Clients with Asset-Map
Financial advisors play a vital role in guiding clients through estate planning and business succession by looking at their entire financial picture and helping them make informed decisions for the future.
Advisors looking to elevate their services should consider using Asset-Map’s robust features to help address many facets of estate and business succession planning. Visit our website today to explore how Asset-Map can transform your approach to these types of planning. Schedule a demo.