Maintaining a Legacy with Succession Planning 101

May 4, 2016

last-will-testament-150x150Any time that a public figure passes away, he or she is lauded for artistry and creative drive. But another facet to life in the public eye also comes to light: the persona of a business owner. Death brings attention to estate planning for individuals as well as succession planning for business owners.

With proper planning, a business owner can ensure that assets are managed in a way that follows a specific strategy to maintain a legacy. Life insurance, employee retention and confidentiality agreements, trusts, and of course, a will are all ways to make things move smoothly after death. A thoughtful succession plan will also keep matters out of the public eye and reduce the risk of scrutiny from the IRS and a state’s department of revenue (if it has an estate tax like Minnesota).

Here are some questions to ask your clients about succession planning. While not exhaustive, this list helps to frame the discussion.

Who will take control?

This includes the personal representative(s) and, if the client so chooses, a trustee or trustees to manage an estate after death. Determining who manages the business when a business owner is gone also should be mapped out. These roles do not need to be placed on the same person; in fact, if the estate and/or business is large enough, one person probably should not be saddled with all responsibilities.

Tax consequences may also affect the decision who should manage the estate, trusts, and the business, especially if assets are set aside for individuals in trust as a way to protect individuals from, as another estate planning attorney has called it, “creditors and predators.”

S030079Additionally, if there are two or more individuals who will be managing the estate and business, will they be able to work together and will they be up to the task? The individuals managing the decedent’s affairs will be faced with winding things up (last income tax return for one) and looking at what are the assets that will continue to drive the business in the years to come (intellectual property for example).

In the case of the musician Prince, for example, his sister has requested that a special administrator be appointed to manage his estate because he may not have made an estate plan.

What should be done with the property?

The type of property will affect how it should be managed. Some items are easier to sell than others (personal effects versus real estate for example). Valuation can also be tricky, and can open up the administrator to challenges if items are valued too low. Keeping or disposing of property will have an impact on future income streams for the business, heirs or devisees, and if charitable giving is also part of the equation, can help alleviate an estate’s tax burden.

A run-of-the-mill Honda CM400 from the 1980s might fetch $800 to $1,500 on Craigslist. Trick it out with a fairing, custom seat and paint job (add a personal logo for flair too), use it on an album cover and in a movie, and the value changes. Significantly.

Intangibles such as brand, which represents the goodwill that a client (or the business) created while alive, can be squandered if in the wrong hands. Placing ownership of these items into a business entity can ensure items are managed as part of the business, making it easier to value, maintain and utilize as a revenue stream.

What law applies?

Individuals and business owners will likely not think about what law applies upon their death, except to the extent that estate or inheritance taxes may be triggered. Individuals with estates that exceed their state’s estate or inheritance tax should be aware of this possibility and plan accordingly.

States will vary in the factors that are used to determine domicile for tax purposes, so check your state’s factors for determining domicile. Minnesota publishes a fact sheet to help clients understand what factors are considered for tax residency; your state department of revenue may also publish a similar resource.

If the deceased owned property in other states, then an ancillary probate proceeding may need to be opened to distribute assets. With careful planning, out-of-state property can be placed in a trust which alleviates the need for an ancillary proceedings and its associated costs. Having out-of-state property in trust can also remove the transfer from the public eye if privacy is desired.