- Our experienced professionals weigh in on the following questions:
- How does succession planning overlap with estate planning?
- What other aspects of financial planning overlap with business succession planning?
- What if your future heirs aren't involved in the business?
- What if the person you picture running the business next isn't the person you want to leave your estate to?
- How are you helping business owners with such wide-reaching issues?
- How do you put clients at ease when the stakes are so high?
For business owners, estate planning and succession planning are inextricably linked. After all, building a business, like raising a family, is a labor of love.
Whether we are thinking about the next generation or the next leaders of our company, planning is really about continuing the love that we poured into the people and endeavors most important to us during our lifetimes.
That's why Jennifer Schuchart, First Horizon Bank Market President; Paul Lankau, a Financial Advisor at First Horizon Advisors, Inc.; and Wendy Martin, a Senior Trust Officer at First Horizon Bank, often work together to help entrepreneurs map their transition into retirement and beyond.
Here's an excerpt of a recent conversation with Jennifer, Paul, and Wendy about how they help business owners plan their legacy on both a personal and business level.
Q1. How does succession planning overlap with estate planning?
Jennifer: When people build a business, for the most part, that's the way they build their personal wealth. The business is the legacy they hope to leave to the next generation in one form or another.
Paul: One challenge that comes up with both succession planning and estate planning is that your family members are all unique individuals. If you have two kids, you probably had to handle some things differently with the younger one than you did with the older one. The same thing might be necessary as you continue to care for the next generation, even after you're gone, using your legacy.
Wendy: Both involve wealth transfer, with business succession planning occurring during life, and estate planning occurring during life and also afterwards. The overlap occurs often, especially if there are multiple heirs, or some heirs who do not work in the business.
As an example, passing things down to multiple heirs can be even more complex, and good estate planning can assist in fair distributions when a business is involved. Let’s say my younger child works in my business and the older one does not. When I pass away, I'd naturally want to leave the business to the child who works in it. I also want to leave something to my child who is not involved in the business, but it doesn't make sense to leave a stake in the business to them. In fact, it could cause a lot of conflict. I would want to consider the other facets of my estate planning in that decision.
In cases like that, it's critically important for a business owner to think about estate planning beyond just the business.
Paul: For instance, they could purchase an insurance policy specifically for the child who won't inherit the business.
Q2. What other aspects of financial planning overlap with business succession planning?
Jennifer: Retirement. Business owners may understand that they need to plan for death or disability, but they may not think about the fact that most of them are also counting on their business to fund their retirement. Transitioning out of the business is really not an if, but a when.
Succession planning helps with the unexpected, but it's also part of planning for the expected events such as retirement. In both cases – just like with estate planning – the main goal is to eliminate as much uncertainty as possible about the future.
Q3. What if your future heirs aren't involved in the business? Will lack of succession planning affect them?
Jennifer: Definitely. Think about this situation: You may think you're leaving your kids a business worth $10 million, but what if it turns out that without you, the business is worth a lot less? If there's not a successor who's capable of keeping it going, the business could be significantly devalued.
Paul: If you are the heart of the business and you pass away, who's going to buy the business from your heirs? Are they going to pay a fair price for it, or will it be a fire sale? Once the heart of the business is gone, will the company struggle to access credit or attract new customers?
Jennifer: We have seen companies become significantly devalued, and we've even seen companies go under when an owner passes away or becomes disabled without a good succession plan. Both for the future of your business and to protect the interests of your heirs, it's important to identify who could fill your role if you were gone tomorrow.
Q4. What if the person you picture running the business next isn't the person you want to leave your estate to?
Wendy: Sometimes the person you identify as the ideal next person to own the business is a key employee or partner. That doesn't mean you have to give the company to them. We can help you plan for that transition and take care of your family as well. What you could do in this case is craft a plan for the employee or partner to buy the business when you are ready to step away, or if you die early or become disabled.
One solution might be a buy/sell agreement.* That simply creates a pathway for one partner to buy out the other's stake in the business. Equally as important as drafting the agreement is funding it. If your heirs aren't inheriting your business outright, but you want them to receive the value of the business, clearly someone is going to have to pay them for it.
Paul: One potential tool to fund the purchase when the time comes is life insurance.* Buy/sell life insurance is a specific type of term insurance that we use to fund the obligations in the buy/sell agreement. And in case you become disabled and can no longer run the business, there's also a special type of disability insurance that's designed specifically to fund buy/sell agreements.
If you decide to retire and want your successor to buy you out, it's not going to be funded by insurance. But we could help you set up investment accounts within the business to prepare to fund that eventuality.
Q5. Usually we think of the relationship with our banker as limited to things such as loans or deposits. How are you helping business owners with such wide-reaching issues?
Paul: Our financial planners will take time to ask questions to kick off the process. Once business owners decide to make or update a business succession plan or an estate plan, we can pull in attorneys, CPAs, and other experts to get everything in place.
Jennifer: Business owners – like all of us – don't know what they don't know. We help them get a better view of the landscape by asking the right questions. Once they get going, we help gather the experts you need to get everything done. It really is a team concept.
Q6. How do you put clients at ease when the stakes are so high? And, second, what's the consistent approach you've taken when you work together to make sure your guidance is tailor-made for each client?
Paul: We put clients at ease by letting them know we have been helping people in this capacity for many years and have developed techniques and resources that consistently deliver positive outcomes. Although it can be complicated, in the end, a systematic, step-by-step approach makes such planning manageable.
As far as tailoring the advice to the client, we start by asking open-ended questions designed to help them articulate what they are hoping to accomplish. This is critical to make sure we're working toward the right goal.
Jennifer: We start with a question like, "Where do you see the future of your business when you're no longer involved?" Even if they haven't put anything on paper, most business owners know the answer to that question. That usually starts us off in a conversation both about succession planning and estate planning, because they're going to have both professional and personal goals.
Wendy: From there, we enlist the help of experts, like financial planners, accountants, attorneys, and trust officers to forge an action plan. Then we help implement that plan. Finally, we conduct periodic reviews to make sure the plan is accomplishing what we set out to do. This allows us to identify early if we're getting off track and make course corrections to put us back on the straight and narrow.
Throughout this process, we're building a long-term relationship with the client. One way First Horizon brings value to that relationship is the teamwork we practice. For instance, when Jennifer and a banker are meeting with a client, they consider whether this person could benefit from meeting with me as well. We arrange for the client to sit down with experts within our bank and in our network, to help them eliminate uncertainty about the future and plan that eventual transition.