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Posted by Dennis Jao

Estate vs. Succession Planning: What is The Difference?

Estate vs. Succession Planning: What is The Difference?

Many people believe that "estate planning" and "succession planning" are two ways of saying the same thing. In reality, however, they are separate processes with different results. An estate plan covers the management of a person's assets when they die or become disabled. A succession plan only refers to what happens to the business or family business when the current owner is no longer around. A succession plan is, therefore, a component of a real estate plan, but not so much the other way around. The important thing is that the entrepreneur knows that he must create both types of plans, not just one or the other.

The confusion between estate planning and succession probably dates back to when "succession" often simply meant that the entrepreneur died and left the business to the heir. In these cases, business succession and wealth management were largely (but not entirely) the same.

But this scenario is no longer common. For today's generations of entrepreneurs, succession is about what happens to the business after retirement, not death. And increasingly, they expect these two things to happen far apart. For example, among millennial family business owners, 78% plan to retire before age 50. (Compare that to the "silent generation," born before 1945, who plan to retire at age 70 or older, often meaning not at all.) Chances are, the real estate plan of these millennial family business owners won't kick in for decades after the succession plan has.

Moreover, the idea that the family business reverts to an heir in the event of retirement or death of the owner is quickly becoming a thing of the past. Recent surveys show that only 31% of family business owners intend to keep the family business after retirement. The others plan to sell it or dissolve it. These two trends mean that succession planning and estate planning have become almost completely decoupled.

We can see the difference between the two types of plans in their different checklists. The essential components of an estate plan include:

  • A collection of all financial assets (including family business)

  • A life insurance policy

  • A will and trust(s)

  • Designated beneficiaries and bequests

  • Legal power

Meanwhile, a succession plan contains:

  • An identified business successor OR a sales plan for the business

  • An independent valuation of the company

  • Life insurance for key people

  • Sale-purchase or shareholder contract regulates the transfer of shares and establishes the financing of their sale.

That being said, there are a lot of interconnections between the two plans. For example, life insurance policies that are included in the estate plan as a tax deferral can play a key role in the financing part of the purchase contract of a succession plan. Provisions contained in the estate plan for the financial well-being of the surviving spouse may affect whether a family trust is in the succession plan. The freezing of assets in the succession plan, which aims to help the entrepreneur reduce his personal tax, will directly affect the company's successor.

Therefore, business succession planners often need to refer to the estate plan in order to align goals and priorities, and succession planners need to ensure that the business has a succession plan clearly documented, taking into account that such a plan (if done correctly) will have many legally binding obligations.

With both plans in place, documented, and scheduled for regular review and updating, the business owner can relax knowing that they have given their vision for the future the best chance of becoming a reality.


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Dennis Jao
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