Successful Planning for Multiple Generations: When and How to Get Started

Developing a succession plan should be top of mind when considering the future of your business and assets. Eventually, you will want (or need) more flexibility in your daily life, and rather than waiting until that time comes to decide what to do, it is prudent to define a strategy now.

Family business succession planning can be complicated. Discussion around succession can be uncomfortable because family businesses aren’t generally transitioned equally. One or two of the kids may be involved, but others may have no interest at all. To set yourself and your family up for success, you’ll need to implement a realistic plan.

You have worked your entire life building and want to ensure assets are passed down to those you love and/or to a charity you are passionate about. There are several considerations when planning for an eventual transfer.

Real Estate: If you own real estate, it’s important to determine if your heirs, or charity, are prepared to take on management responsibility. For example, you might own 10 houses and spending time managing the properties is what you do. However, is your next generation willing to take on such a large project? Can your charity of choice even ‘own’ them? If not, your succession plan should include strategy around the sale of the properties.

Individual Retirement Accounts: If you have assets in traditional IRA’s, your beneficiaries will likely need to distribute all the assets (and pay taxes on the distribution) within a 10-year period. To avoid big tax bills for your beneficiaries, Roth conversions during lower income years, or fulfilling charitable gifts with IRA assets, can be very impactful and can potentially provide considerable tax savings.

When planning for a transfer of assets, you may consider putting them into a Trust and allowing assets to remain in Trust for your beneficiaries throughout their lifetime. This strategy allows you to protect assets as they move to future generations. For example, if one of your beneficiaries gets married, assets inherited in trust may protect against division in the event of a divorce. If one of your kids starts a business that fails, assets in trust can also protect from creditors.

If the language in the trust isn’t drafted correctly or up to date with the current tax law, the Trust may not provide the protections you were initially seeking. Required Minimum Distributions (RMDs) for retirement assets in a Trust have become quite complex.

If you are considering transferring a business, it’s important to first realize control, management and ownership are not the same. For example, you may decide you’d like to transfer the management of your business to one person or group of persons, while transferring ownership to your kids, whether they are actively involved in the operation of the business or not.

Regardless of how you define control, management, and ownership, you will want to work closely with financial professionals and lawyers who specialize in business succession planning.  Together they will be able to offer advice and strategies focused on the details of your business, including how to potentially minimize taxes when the transfer does take place. This is crucial, as failing to have a proper strategy in place is one of the primary mistakes we see when it comes to business succession planning and your own retirement.

For many businesses, family is the primary consideration in succession planning. From the future management of your company to ownership details and tax liability, your decisions will ultimately have an impact on one or more members of your family. Here are a few tips to keep in mind during this transition:

Tip #1: It’s Never Too Early to Begin Planning

The sooner you begin preparing your business succession plan, the sooner you can begin implementing the details. You may have been advised to build an exit strategy directly into your business plan, which can be beneficial in the long run but can be complex to change if you later find a dated strategy no longer optimal. The time you invest on succession planning, will likely be rewarded with a smoother transition.  

Tip #2: Involve Family Members 

Creating a succession plan quietly on your own (and then “announcing” it to all those who will be affected) can be a recipe for disaster. Instead, we see the most successful strategies pulling together family members early on so that you can discuss and strategize together. Together early will also provide time for real discussion around major career decisions involving the family business or the pursuit of other interests.

You may also discover during this time that some family members are passionate about certain components of the business while others are most capable of handling other aspects. Most importantly, by involving your family members, you may realize that a succession plan which keeps the business in the family may not be the best decision after all and, ultimately, it would be best to sell. Communication is key to creating and implementing strategy that will help your business thrive while keeping your family dynamic strong.

Tip #3: Train Your Successors

You’re more likely to achieve success with your transition plan by working with your successors for an ample amount of time before you hand over full responsibility. Beyond the day-to-day, also consider involving your successors in strategic planning and decision-making five or ten years out. While it may be difficult to give up some control while you are still very much “in charge,” allowing your successors to be a key part of strategic initiatives will greatly improve their ability to continue to handle this after your exit.

Tip #4: Acquire Outside Help

A variety of professionals, including lawyers, accountants, financial advisors, etc., can help you organize and develop a successful succession plan. With expertise, you may find yourself analyzing options and considering details that you wouldn’t have thought of otherwise. By partnering with professionals, like Buttonwood, who have been involved with family business succession planning, you’ll have the added benefit of someone to facilitate the process of working through potential issues.

At the end of the day, it’s important to take into consideration what will ultimately be in the best interest of your family. Multi-generational asset and business succession planning can be complicated because it requires you to make difficult decisions with your loved ones in mind. By connecting with professionals and utilizing a process that outlines the details involved, you’ll be able to ensure an effective, more efficient, and successful plan to help your business maintain growth over time. If you would like to speak with one of our Advisors, contact us today. 

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