Succession and Estate Planning: Differences and Commonalities

While the two share some components, they have very different implications

Key takeaways:

• Succession planning helps business owners or leaders plan for the transition when they leave the business
• Estate planning is focused on how your personal wealth will be distributed and managed after you’re gone
• Most people need an estate plan, but not everyone needs a succession plan
• Planning both together helps optimize unique tax obligations 

It isn’t always easy to face the reality that one day you won’t be around. But taking steps to protect your assets, business, and personal wealth now will help you leave things the way you want after you pass. And part of that effort for entrepreneurs involves having the right succession plan in place to protect their legacy.

Many people go through the estate or succession planning process without considering how the two are intertwined. Let’s walk through these essential planning processes and some key ways they differ—but influence each other.

What is succession planning?

When you own a business, succession planning helps you develop a strategy for what happens when you leave it, whether you want to pass it to the next generation, sell to an outside buyer, or allow your family to distribute the associated assets when you die.

Succession planning answers these questions:

• Who will take over after you’re gone?
• What will the staff and management structure look like?
• How will the transition be handled?
• What are the goals for the future organization?
• Should the business be sold instead of continuing to operate in the family?
• What will the tax implications be?
• How can I lower the tax burden?

For a succession strategy to succeed, roles must be clearly defined, and all details must be outlined. The goal is to ensure that everything continues to operate when a leader (or leaders) passes away, retires, or sells. 

What is estate planning?

Estate planning, of course, is about passing along overall wealth rather than a business. A person’s estate refers to their assets, including their financial accounts, car, properties, investments, valuable possessions, life insurance, and more. Estate planning aims to create a strategy for distributing these assets after someone passes or becomes incapacitated.

Estate planning answers the following questions:

• Who will manage your financial affairs?
• What beneficiaries will receive your property, financial accounts, and other assets?
• Who will be the guardian for your children’s care if they are minors?
• Who will be responsible for your debts?

The planning process includes creating a will, a living will, and/or a trust. The will outlines precisely how assets will be distributed to beneficiaries but usually has to go through probate, which can take a while, is a public record, and may be stressful for any heirs. Funding a trust allows individuals to avoid probate while providing unique tax benefits and methods to protect the assets.

An estate plan considers all of these moving parts so that the wealth you’ve worked hard to build can be distributed and managed according to your wishes.

The differences and similarities of succession and estate planning

Most people need an estate plan, whereas not everyone needs to worry about succession planning. If you don’t own a business or aren’t involved in a family business, you won’t need to go down that path. 

Succession planning can become heated fast. Not only are you figuring out what to do with the business, but other stakeholders will have opinions about what should happen. Your family members could disagree with your choices, and things could become emotional and stressful quickly. But without a plan, the business will have no clear goals or direction, there may be no clarity about who is in charge, and things can fall apart quickly. So it’s wise to start and solidify this process as soon as possible.

Similarly, estate planning helps you put out potential fires after you’re gone or incapacitated. When you have everything outlined, there is no question about your wishes and what should happen. Loved ones might be unhappy with your choices—but with a strong estate plan, there’s little they can do about it. And you don’t necessarily want any heirs to deal with a lengthy, frustrating probate process when they’re already handling a tragic loss. 

Both of these processes are key to tax optimization. Estate planning helps you ensure that there won’t be surprising tax liabilities for your heirs once you’re gone, and succession planning both improves the business while you own it and prepares for an eventual—and smoother—transition. 

One good example of structuring things well is considering a family limited partnership. This business type can help reduce the tax liability when shifting wealth to other family members. These partnerships limit your taxable estate because you are transferring business assets to your heirs. Business interests will also qualify for the gift tax exclusion when you pass them on.

Talk through your succession and estate planning questions with a professional when you’re ready to put strategies in place to protect your loved ones.

Contact Provident CPA and Business Advisors

Succession planning is one of the best steps you can take right now to ensure your business is set up for success after you’re no longer around—ideally in happy retirement. Provident CPA and Business Advisors is here to help you create a plan with the proper steps for a smooth transition. We can also help you understand the implications of your chosen business structure and minimize your taxes as part of an estate plan.

Contact Provident CPA and Business Advisors to learn more.