What is a Succession Plan?

Kaycee Cuaira

succession plan

A succession plan is an important part of the estate planning process if you are a business owner. Having a plan in place for what should happen with your business when you are gone will make the next steps easier on your family and those involved in your business. A succession plan is particularly important for closely-held businesses.

What is a Succession Plan?

A succession plan is a written document that provides the day-to-day operations of the business upon retirement, disability, or death of the owner. The plan is what you want it to be—whether you hope to keep the business in your family or sell it to someone else, it’s important to have it outlined. The idea is to make the transition process as easy and seamless as possible when leadership changes.

Don’t wait to get a replacement plan in place; consider it as part of your retirement planning. You can always modify it later, as needed. The transition doesn’t have to be a crisis if plans are made ahead of time – it can be a time for career and talent development as employees steps into leadership roles.

What should a succession plan include?

A succession plan should include as many details as are necessary to make the leadership and operations transition as smooth as possible. You might want to include your human resources team to facilitate the transition. Your formalized succession plan can be as specific as you like, but there are some basic components that should be included:

  • Identifying someone capable of running or leading the business
  • Family vs. non-family ownership
  • Retirement income for the current owner(s)
  • Estate taxes
  • Specific arrangements for transferring ownership and management
  • A buy-sell agreement for co-owners
  • How to handle management disputes
  • Equitable compensation planning

What if there are co-owners?

If there are co-owners, you may consider a buy-sell agreement, which provides that if any of the owners die, their interest is automatically purchased by the remaining owners. This ensures that the heirs of the deceased owner do not become business owners by accident. The spouse or family of the owner may wish to inherit the owner’s share after they die, especially if they are intimately involved in the business, but if they are not, a buy-sell agreement is the better option.

If you elect to have a buy-sell agreement, then your company can purchase buy-sell insurance so there is cash available to buy shares if necessary.

Does the business pass through probate?

Any assets that you own, including business assets, must pass through probate, unless they are part of a trust or an account that allows you to name a direct beneficiary. There are some options for establishing a trust for business assets that can be helpful for tax purposes and for avoiding probate.

For example, a Grantor Retained Annuity Trust (GRAT) and a Grantor Retained Unitrust (GRUT) allow the grantor (owner) to place assets in trust but still retain the right to an annual payment from the trust for a certain number of years. The property initially transferred to the trust is considered a gift, and the annuity received by the grantor counts as a deduction from that gift. If the assets or property appreciate faster than the rate assumed by the IRS, then the value received by the beneficiaries will be more than what is calculated on the grantor’s gift tax return. The property in the trust will avoid probate and the trust may help reduce or avoid estate tax liability.

Making gifts to reduce tax liability

If you have a large estate and are approaching or surpassing the federal or state estate tax thresholds, one technique for reducing the estate tax liability is to make a gift at a discounted value of a minority ownership interest in your company. Consulting with a tax attorney about this possibility is highly recommended, so you can ensure that you are following tax laws correctly and not exposing yourself to more liability rather than savings.