Whether you started a business from scratch or took over the reins of the business your parents or grandparents started, family plays an important role. Traditionally, people started businesses, considering their children would continue their legacy. The seed they sowed would give fruits to their future generations. Hence, children from business families are trained in family business from childhood. They knew that they would one day own the business and all the assets and liabilities that come with it. This unspoken understanding created a misconception that estate planning is similar to succession planning. 

Not having a formalized succession and estate plan had a ripple effect on the business and family assets after the death or incapacity of the business owner. While they do have overlaps, they are different in many ways. This article will help you understand the difference and when and why you need them. 

What is Estate Planning? 

Estate planning is a detailed plan on how you wish to distribute your estate to beneficiaries (family or non-family) tax-efficiently after your death or incapacity. It is more of a procedural thing wherein you appoint a Power of Attorney or executor (for a Will), a nominee (for life insurance), and a trustee (for a family trust) to execute the distribution of the estate as per your instructions. 

You can do estate planning in isolation with the help of tax and legal experts. They can help you structure the assets so their ownership transfer has lower tax implications. Anyone with assets like property, jewelry, antiques, or business needs to do estate planning to avoid family disputes and litigation on the distribution of assets. Without an estate plan, the court determines who gets what. This distribution may not be tax efficient, and the family could risk losing the entire estate to tax bills. 

What is Succession Planning? 

Succession planning is a more comprehensive plan and process to identify your successors, train them, and hand over the ownership tax-efficiently. Your share structure should be such that the owner can gradually pass on the ownership while retaining some control, like veto power, if necessary. Succession planning is a more emotional and personal decision that you take along with business partners, beneficiaries, and family members. 

You need a skilled business consultant to plan your succession as it involves business structuring. You need a succession plan if you have a successor and plan to retain your business within the family or employees. 

There are chances that none of your family members can take over the reins. In such a scenario, you can pass on the business management to partners or employees who can take the legacy ahead. Succession planning also involves protecting the value of the business and determining the valuation methodology in the event of the sale of the business to a third party. 

Without proper succession planning, your business could lose direction, employees could lose faith in the leadership, and family disputes could spring up litigations after your demise. 

How is Estate and Succession Planning Different?

Both estate and succession planning deal with transferring assets and business to beneficiaries. But they are different from each other in many ways. 

Objective: The succession planning objective is to transfer business while you are still alive and maybe on sudden death or incapacity. The estate planning objective is to transfer business and other assets like property, jewelry, or any family heirloom after your death or incapacity. 

In the early days, business owners worked till their last breath, because of which succession and estate were used interchangeably. But things are changing. Many business owners want to transfer the business to their successors, retire early, and enjoy their estate. This gap in business succession and death has created the need for separate plans for succession and estate. 

Implementation: A succession plan needs a competent successor with business acumen who can run the business after you, which estate planning beneficiaries don’t need. The estate plan needs an unbiased and trustworthy executor or trustee who can distribute assets as stated in the plan.  

Involvement: You can make an estate plan without consulting your beneficiaries but must keep your trustee or executor updated about the changes. You can also make arrangements for your dependents, such as a minor and spouse not well-versed or actively involved in the business. In the case of succession planning, you need the active involvement of the successor and the approval of other employees, management, and family members to ensure a smooth business transition.   

How is Estate and Succession Planning Connected? 

While estate and succession planning are different, the tools used (a will, a family trust, a holding company, and life insurance) are the same. A change in estate planning could affect succession planning. 

For instance, if you freeze your estate by converting equity shares into preference shares, it could affect the business successor directly. Succession planning is a part of estate planning. Both should be done in sync with each other’s objectives. The bigger and more complex your estate and business, the greater the need for estate and succession planning. 

Contact Glenn Graydon Wright LLP in Oakville to Help You with Both Estate and Succession Planning 

A skilled tax consultant and business consultant can guide you through the most efficient business structure that can preserve the value of your estate and is in sync with your end goals. To learn about how Glenn Graydon Wright LLP can provide you with your estate and succession planning, contact us online or by telephone at 905-845-6633.