Without planning, a family business may not survive the death of its founder or leader. An estate plan alone cannot guarantee continuity of the family business.
A legacy assessment goes far beyond an estate plan and helps the family deal with business law and other issues arising from the death of a family member. These include possible liquidity gaps for covering estate taxes, who will manage the family business, unintended consequences of charitable gifts, conflicts among beneficiaries and other matters affecting business stability and financial success.
A legacy assessment allows family members and their business management to methodically make and revise succession decisions. These decisions and planning can be exceedingly difficult during the stressful period after a family member dies when the business may be in turmoil and other matters distract family members.
Through a legacy assessment, managers and family members can consider the complete business consequences when a key family member dies or suddenly retires. A broad, thoughtful, and organized process can reveal knowledge and documentation deficiencies and other critical areas that may impact business continuity and the family’s financial condition.
The senior generation of high-net-worth families often own or control a large share of the business, but there are many other individuals who have a stake in the business and are affected when senior management dies or retires.
These include family members concerned about legacy issues. Non-family senior officials or management careers are often stakeholders because their roles in the business may change.
A legacy plan begins with a 90-day drill. During that period, management identifies the financial, accounting, legal regulatory and administrative issues that should be addressed immediately after the key person’s death or retirement.
Next, there should be financial projections. This involves a review of all assets and estate planning documents to identify the financial consequences of the key persons’ death.
Planners should also engage in an asset disposition analysis. This includes analyzing retirement plans, insurance policies, equity ownership agreements and disposition of certain assets.
Finally, the founder or leader should participate in this process. Their expectations and wishes can preserve their legacy, improve family relationships, and reduce conflict and confusion.
A recent MLR Media pulse survey of businesses, many that are family-owned, revealed that 52% of respondents did not have a formal board process for succession planning. Only 30% or respondents reviewed their plans each year.
Inadequate planning, however, can have serious consequences. Examples include:
- A child being disinherited by accident because their estate tax liability exceeded the value of the business they assumed.
- Executive departures destroying a business because it was left to a charity which does not want to keep it in operation.
- Family members administering a large estate even though they do not get along.
Attorneys can assist businesses and family members with this planning. They can help them prepare the business and estate documents for their plans.