The Estate Planning Process
By Loyd Rawls
More often than not, the uninformed would conclude that estate planning and succession planning are one in the same. Estate planning is indeed an important planning sector, but is by no means the essence of succession planning. Business succession planning addresses the transfer and continuity of a business including tangible assets, intangible assets and the culture which has supported the historical strength, resilience and success of the business. Aggressive succession planning actually encourages the transfer of a business to the next generation prior to the deaths of the parental principals. Unfortunately, this ideal lifetime succession planning achievement is rare because of financial security concerns and tax restrictions. As a result, an effective succession plan must also address the transfer of assets, which usually includes significant business interest through the estate.
Estate planning supports business succession planning by providing for the efficient fulfillment of your asset transfer goals after your death. Estate planning is essential to succession of the family business to prevent the assets of success from becoming the liabilities of succession. No one has the true confidence that she or he will be blessed with independent cash assets or the life span to sell, gift or otherwise transfer the business to the children prior to the settlement of an estate. The passage of a complex, capital-intensive business through an estate can create a myriad of problems for successors, family employees and vendors. The owners of a successful family business have a stewardship responsibility to develop estate plans that will minimize the impact upon these survivors who have a direct or indirect interest in the continuity of the business.
To avoid confusion, let's define estate planning. You can better understand the definition of what estate planning is by specifying what it is not. Estate planning for succession is not doing a new will, adopting a trust, buying some life insurance, taking care of the Mrs. or a project. No, estate planning for succession of a family business is not something that you can take care of and file away for your attorney to dust off and read to your children when the Lord takes you home.
Estate planning is the ongoing process of designing, expressing, adopting and refining the documents, structures and programs needed for the achievement of your family business continuity objectives. It is the implementation and continual refinement of the structures, documents, etc. that are necessary for the efficient closure of your affairs and the transfer of assets to your designated heirs. Estate planning is the communication of those plans to the family, partners, key personnel and vendors who will be affected by your death.
In summary, estate planning is the general term that describes the development and implementation of strategies concerning the transfer, management and perpetuation of an individual's or a family's assets from one generation to the next. Because of the date of application (after your death), estate planning is a truly sacrificial effort that directly benefits your family and beloved employees, and indirectly benefits others. Hopefully, in fulfillment of the spiritual law of giving, estate planning will be one of your most gratifying effort while on the planet Earth.
Estate planning endeavors to accomplish three ambitious goals. The first goal is to establish a plan for the continuity of family assets, notably the family business. Secondly, estate planning initiates the transfer of those assets to family members and charities prior to death to the maximum extent possible. Finally, upon death, estate planning completes the transfer of assets at minimum cost and administrative hassle, according to the wishes of the decedent. Notably, we will be relating estate planning to transferring a business from one generation to the following generation at minimum cost, with minimum hassle and with due consideration as to whether children are involved in the business or are seeking other careers.
Estate planning for family business succession can be relatively simple or complex, depending upon your circumstances. On more than one occasion, such as with Mr. Oranges in the preceding chapter, I have been accused of making estate planning too complicated; however, in these circumstances, I tried to help my client recognize that the real source of complication was the relationship, objectives and circumstances. Ambitious goals, such as financial independence, total harmony, no publicity and no tax combined with challenging circumstances such as significant assets, multiple marriages, multiple children, drug abuse, irresponsibility, handicaps, partners, and sibling rivalry demand high tech (complicated) estate plans.
Individual states have also complicated matters by creating administratively burdensome probate laws to protect the rights of decedents, beneficiaries and creditors. Individual states and the federal government have also confused matters by levying taxes of up to 55% on property transferred between generations. Specifically relevant to the succession theme of this book, the states and the federal government have developed a broad and convoluted body of laws to control the conveyance of wealth from one generation to the next. Admittedly, estate planning can be a challenge; however, this challenge is not insurmountable. With sufficient time, patience and resources, effective estate plans can be established and maintained.
Depending upon your personality and perspective, estate planning can be a real chore. I have witnessed phenomenal procrastination of estate planning by business owners. Unfortunately, in some cases they were incredibly successful at totally avoiding the subject. As you can imagine, the results were substantial frustrations, stress and hard dollar loss to family, beloved employees and others. These experiences have enabled me to conclude that there are several requirements for an individual to address estate planning. These requirements include:
- Recognition of mortality
- Recognition of responsibility
- A willingness to give
- A willingness to sacrifice
- A conviction to take action
If you cannot come to grips with your mortality, estate planning will stress you beyond your limits. Unfortunately, mortality is a profound reality. If you feel no responsibility to establish plans to preserve your business and protect your loved ones from estate hassles, you will not have the ability to stay on task to address the details of how to protect and prudently disperse your hard-earned resources. If you are not motivated to give your children the assets that you have earned, you will receive no gratification from the laborious estate planning process and will probably lose enthusiasm before completion. If you are unwilling to pay hard-earned money for professional assistance and spend valuable time dealing with frustrating details, you will resent the cost of the effort and will probably pull out of the program before completion, or later fail to spend the time and money to keep current. If you do not have the conviction to stop talking and start moving forward, estate planning will always be a great idea that you will never get around to doing or completing. In self-examination, you should confirm that you have come to grips with these requirements before you make a profound statement that you are ready to do estate planning. Otherwise, you will be highly prone to embarrassing yourself, frustrating your family, wasting time and wasting money.
The estate planning process is about the preservation of a legacy. Your legacy is the spiritual remembrance of your presence here on earth through the continuity of the fruits of your labor. Estate planning provides the opportunity to allocate the time, effort and money to protect the business you have created from the jaws of government bureaucracy, taxation and management challenges.
Loyd H. Rawls, CLU, ChFC, MSFS, of The Rawls Company in Orlando, Fla. has specialized in family estate and succession planning for closely held family owned businesses since 1973. lrawls@dealeronline.com
