The Estate Planner’s Role in Succession Planning

The Estate Planner’s Role in Succession Planning

A 10-step guide

Regardless of the size of a family business, succession planning for family enterprises presents a unique set of challenges. Not only can it be a complicated, emotionally taxing process, but also, it carries the potential to detrimentally affect family relationships, which can strain the business itself—often to the breaking point. Even if you manage to craft a plan that appeases the entire family, you’ll have only solved half of the puzzle. To create a successful business succession plan, estate planners must find the answer to two equally important and often conflicting questions: (1) What’s fair to all family members? and (2) What’s best for the business? 

The difficulty of striking an effective balance between these two factors is evident in the number of businesses that fail to survive succession; some estimate that as little as 12 percent of family businesses remain viable into the third generation.1 Estate planners, therefore, must work to develop the skills necessary to improve the end result of business succession because the need for this type of planning is set to increase dramatically in the coming years.

Family-run enterprises make up a significant portion of businesses within the United States, and a growing number of the nation’s 76 million baby boomers—many of whom own businesses—are approaching retirement age.2 Because many of these business owners will be looking to plan their exit from the companies they’ve established, it’s important that estate planners prepare for their role in the succession planning process. This preparation, however, can be a daunting task. Unlike other areas of estate planning, business succession planning has no standard structure or set of forms that attorneys can simply tailor to satisfy the client’s needs. Planning for the succession of a business is fundamentally an exercise in problem solving. Every family is different, every circumstance is different and there are often no clear answers to conflicts that may arise.

Despite this lack of uniformity, there are specific steps planners can take to help facilitate as smooth a transition as possible. Here’s a list of 10 steps estate planners should adopt as their standard approach to attaining the perfect balance between pleasing the family and protecting the business. (See “Learn From Other Families,” p. 40.)


1. Start the Process

The first step is simply getting the planning process started, and estate planners have an inherent advantage in this regard. Many business founders erect substantial psychological barriers to the idea of passing on the ownership and control of their businesses, but once a relationship is established between a client and an estate planner, the long-term planning discussions can more easily transition into a dialogue of what the client’s goals are for the future of his business. Indeed, as is commonly encountered in the area of estate planning, clients are often reluctant to contemplate how their world will function without them. Attorneys can help avoid this planning paralysis by acting as the instigator and asking the questions necessary to push the client to face the tough issues.

For clients who want their business to continue to grow and thrive long after their departure, estate planners must stress the importance of grooming a successor. Not only is this a long, slow process that, in many cases, occurs over many years, but also, it provides a safety net if the founder unexpectedly passes away. Warren Buffett stresses the importance of pinpointing a successor by requiring all Berkshire-Hathaway business managers to submit a succession plan—and update it regularly.3 This practice highlights an important question estate planners should be asking all business-owning clients: Who will take over tomorrow if you become incapacitated tonight?  

Early planning, however, is not only useful to plan for the possibility of future calamities, it also allows clients and their families to reap great rewards in the event of future success. When Wal-Mart’s Sam Walton, in 1953, transferred 20 percent of his company to each of his children and kept 20 percent for himself, he may not have been able to appreciate the amount of time and money he’d saved for his family in the future, but he certainly appreciated the concept, stating later on in his autobiography that “[t]he best way to reduce paying estate taxes is to give your assets away before they appreciate.”4


2. Create an Action List

Because business succession is typically only one aspect of the planning being performed for the client, task prioritization is an important tool for attorneys. With complex projects like succession planning, it’s easy for the client to become discouraged, and it’s the attorney’s responsibility to keep the client engaged in the planning process. Prioritizing projects so that the simpler tasks can be completed first will allow the client to feel he’s accomplishing something. Creating this kind of momentum can prevent the succession planning project from stalling out.  


3. Form a Planning Team

Business succession planning is too complex to be successfully accomplished with just the client and the estate planner. Rather, it requires a team of advisors. Critical to the team is someone who has a long-standing relationship with the family. Whether a CPA, attorney, financial advisor or respected family friend, this role should be filled by someone whom the family trusts and who maintains a high degree of credibility. The profession of this person will vary from family to family, but the purpose of his presence remains the same: to provide a voice of reason that emanates from an intimate knowledge of the family dynamic and inner workings of the business. 

In some cases, it may be beneficial to add an outside consultant who can assist with the psychological aspects of the succession planning process. Client meetings can often become emotionally charged, especially if family members are present, and the presence of someone skilled in confronting behavioral issues can help create an atmosphere that’s more conducive to productivity. But, regardless of whether an outside consultant is used, there must be someone on the planning team who can serve as the “quarterback”—coordinating all the pieces and ensuring continued progress. Even a task as simple as using time at the end of a meeting to establish goals and schedule the next meeting can make a significant difference in the efficiency of the planning process. 


4. Manage Expectations

Providing clients with a realistic picture of the ultimate outcome and the difficulty of the planning process can help prevent dissatisfaction and frustration. Estate planners must stress to clients that, when it comes to business succession, there’s no perfect solution. It will likely be impossible to achieve perfect equality among children, and no one will receive everything he wants. It’s also important to alert clients to the typical time frame. Business succession planning is a process that evolves over time and necessarily includes multiple meetings.  


5. Identify the Issues

Creating an effective solution will be impossible until all the problems have been identified. Ascertaining key stakeholders and conducting individual interviews can help provide a clear picture of the concerns and desires of those involved. It’s important to include the founder’s spouse, key employees, children and even the children’s spouses. Although in-laws might not have direct involvement, they’ll have opinions, and those opinions can often greatly influence the planning process.    


6. Define the Desired Outcome

The desired outcome for the succession of any business is a plan that can be deemed successful by as many of those involved as possible. But, how is success defined in this area? Because so much of succession planning is determined on a case-by-case basis and because no two succession plans will likely be identical, estate planners should remain flexible in their idea of what success will mean for each family. There are, however, a few factors that are common within many effective succession plans:


The business is managed by people who have the right skill set.

The business generates cash flow for all of its owners.

There’s an exit strategy in place for those who decide they would like to exit the business.

The business is only a reasonable portion of each owner’s overall financial picture.  


If the above factors are unattainable or the family dynamic is too dysfunctional, a sale of the business may be the best chance for success. Even though some business owners wish to stipulate that the business should never be sold, it’s important to remember that even the Rockefellers sold Rockefeller Center. But, regardless of whether the desired outcome is a smooth transition to the next generation or a sale, if the planner, the client and the family all have an accurate understanding of where the planning is headed, the road to get there will be considerably less bumpy.


7. Search for a Solution

Because every family is different, searching for a solution shouldn’t be about using a cookie-cutter approach, but rather should entail evaluating a toolbox of planning options. Estate planners have to find the right fit for their client, and in this regard, succession planning is more of an art than a science. For example, some families may operate companies with assets that can be easily divided and distributed, while others may require more complex and creative planning. 

Another significant issue to consider is how to pass down the stock of a corporation. In other words, who gets to elect the board of directors? When some family members are more involved in the business than others, this question can create serious friction. As estate planners, it may be necessary to create different classes of stock, design trusts to own the stock and profile the qualifications for future board members (including some outside board members who bring an objective, non-emotional viewpoint). Ultimately, to ensure the success of the business, the board of directors must be able to function as a rational body. 

Whether children should receive a managing role in the daily operations of the business can also become a delicate subject. Despite the best of intentions, some children simply aren’t sufficiently qualified to take on an influential position. Richard Rainwater has opined on this precise issue, as chronicled in the book, Money Masters of Our Time: 


What has always struck me as odd is that if you look at corporations, even corporations that begin as family businesses, the way they promote people is based on skill, not bloodlines. But most families continue to make the decisions on who will manage the fortune based on bloodlines.5


Hiring someone to objectively review the business to evaluate the skills and qualifications of its employees can provide a safe way to approach the discussion of who should receive leading roles in the operation of the business.  

If there are children in the family who won’t be involved in the business, it’s important to create a plan  for them to receive sufficient cash flow. If such an arrangement doesn’t align with the best interests of the business, other tools—such as life insurance—can be used to resolve the issue. Establishing an irrevocable life insurance trust (ILIT) may not solve all planning problems, but it can help create liquidity and equalize inheritances among children. 

The timing of a transfer of the business can also serve as a planning tool. With some families, it may be wise to transfer the business before the client passes away, which allows the client to help in the process and provide support and guidance for the family throughout the transition. Through careful drafting, it’s possible for the founder to move assets into a trust of which he’s a trustee, thereby keeping the client in the driver’s seat of the business. Estate planners must, however, consider the potential consequences of this scenario because it may not always be in the best interest of the family or the business. 

Resolving potential estate tax liability issues is also a substantial part of a successful succession plan. Using estate freeze techniques and ILITs can serve as effective tools for dealing with estate tax, but regardless of how the issue is addressed, estate planners shouldn’t forget that determining exactly how the check will be written to pay for the tax is a key piece of the planning puzzle.


8. Get Stakeholders’ Buy-In 

There’s no question that having the support of the client is vital to the planning process, but estate planners shouldn’t underestimate the significance of getting buy-in from the key stakeholders. While the feasibility and wisdom of conducting family meetings will depend on the dynamic and characteristics of each family, it’s undeniable that finding a way to gain the support of the family will not only make the planning process smoother, but also will increase the likelihood that the plan will ultimately be successful. Once a family member makes a mental commitment to finding a solution, he’ll be much less likely to stand in the way of arriving at that solution. This concept is well-founded in the field of psychology.  Dr. Robert B. Cialdini stated in his book, Influence: The Psychology of Persuasion, “Once a stand is taken, there is a natural tendency to behave in ways that are stubbornly consistent with that stand.”6


9. Address the Challenges

Although the entire process of succession planning is challenging, there are certain obstacles that are common to all types of clients. Over time, planners will, no doubt, develop their own strategies to combat frequently encountered challenges, but there are two problems that are so common in succession planning, all estate planners should be prepared for their inevitable occurrence: (1) reluctance to begin the planning process; and (2) family conflict. Below is a discussion of ways the planner can effectively confront these two issues. 

Reluctance to begin planning. Rarely does a family begin their planning early enough. As already mentioned, a business founder often harbors fear over what may transpire if he steps down from his role in the business. Some clients worry that their lives will be empty and boring or that they’ll no longer be welcome at the office. Others express concern about whether their family can remain functional and trusting of each other and whether the business itself can continue to thrive without them at the helm. These are legitimate fears, but they’re fears that can be relieved through careful planning. For example, a popular option is for the business founder to open a family office to be responsible for philanthropy and investing in things outside of the family business. This structure provides a transitional environment for founders so that they don’t feel as though their skills are no longer useful. 

Fears of a dysfunctional family or a failing business may be more complicated issues to address, but in doing so, estate planners can’t be blind to the fact that, in some instances, selling the business may be the best solution. If the family members are wholly incapable of trusting each other or working together, it will be impossible for the business to survive after the patriarch—or matriarch—is gone. The estate planner must be willing to explain to the client that a sale may be in the best interest of everyone involved and should be strongly considered. 

Avoiding family conflict. Family members often maintain conflicting goals and visions for what the future of the family business should look like, and it’s not uncommon for families to be composed of drastically different personalities. It is, therefore, generally impossible to create a succession plan that pleases everyone and avoids any kind of friction or conflict. Family members will disagree, but there’s a tool estate planners can use to diminish the likelihood and intensity of conflict during the planning process: ensuring that no family member feels that his interests and wellbeing have been ignored. Accordingly, planners should strive to convince the key stakeholders that their voices are being heard. 

This goal can be accomplished through individual interviews with each family member, but it’s also important for the estate planner to create an agenda for family meetings, so as to cultivate a productive atmosphere where family members feel invested in the conversation. Because people will generally support what they helped create, estate planners should focus on the commonalities and values that all family members share to establish the mindset that the family is working together for a solution. The planner, however, shouldn’t ignore the fact that each family member maintains a unique set of aspirations and concerns. Rather, the planner should strive to acknowledge and understand the motivations of each individual because “appealing to interest is likely to work better as a matter of human persuasion than appeal to anything else.”7 Indeed, avoiding family conflict is often best achieved when each family member believes the succession plan is in his own best interest.


10. Implement the Solution

This step may seem relatively straightforward, but it’s imperative that the client and family understand that implementation of the plan may be a multi-year process. Training a successor is a key responsibility of the founder, and it’s one that can greatly increase the probability of the business’s continued success. This idea is well established in the publicly traded corporate world, where grooming a replacement is often a substantial part of a CEO’s job description. In the South, this concept is sometimes referred to as “riding in the truck” with the patriarch of the business. The fateful story of a successful Texas businessman depicts how the wisdom behind this strategy can help safeguard a business from the unexpected. 

As the founder of an oil and gas company in Texas, Steve (name changed for privacy) had worked hard to build up his business and understood the importance of grooming a successor to replace him one day. Steve identified one of his sons-in-law as the best fit for the company’s next leader, moved him out of an insurance career and spent five years mentoring him. When Steve died unexpectedly in a plane crash, the son-in-law was trained and ready to continue his father-in-law’s legacy. Steve’s prudence in planning for the future provided a safety net for his business during a time of unanticipated transition.

Even if selling the business is the best option for the client, estate planners should point out that selling a business can sometimes take several years, and the way in which the sale carried out can have a profound effect on the value of the business. Regardless of when the client would, ultimately, like to exit the company, the process of preparing a business for a sale should begin long before the sale occurs. The stability of the economy and the client’s industry in particular are unknown variables. Business owners should position their company to be ready for purchase so that when the time comes to sell, they can maximize the sales price and minimize the tax cost.  


A Delicate Balance

From multi-billion dollar family empires to mom-and-pop family business, the basic tensions remain the same. Achieving what’s fair for the family member and ensuring the business is successful are two factors which often weigh heavily against each other—and sometimes, one must give way or neither goal will be accomplished. Sometimes, however, there’s a delicate balance that can be attained, and it’s the estate planner’s responsibility to find that balance. Although the solutions will vary case-by-case, the 10 steps laid out above will equip estate planners with a process to follow to create an effective succession plan for all types of family businesses.    


1. Family Business Institute, Succession Planning, www.familybusinessinstitute.com/index.php/Succession-Planning/.

2. Sarah E. Needleman, “Finally, a Good Time to Sell the Business,” Wall Street Journal (Oct. 23, 2013), http://online.wsj.com/news/articles/SB10001424052702304682504579153573588055100.

3. Warren Buffett, Memorandum (July 26, 2010), www.berkshirehathaway.com/letters/2010ltr.pdf.

4. Zachary R. Mider, Bloomberg.com, “How Wal-Mart’s Waltons Maintain Their Billionaire Fortune” (Sept. 11, 2013), www.bloomberg.com/news/2013-09-12/how-wal-mart-s-waltons-maintain-their-billionaire-fortune-taxes.html.

5. John Train, Money Masters of Our Time (HarperCollins Publishers, Inc. 2003).

6. Robert B. Cialdini, Ph.D., Influence: The Psychology of Persuasion (HarperCollins Publishers, Inc. 1993) (2006).

7. Lecture by Charles T. Munger to the students of Professor William Lazier at Stanford Law School, Outstanding Investor Digest (March 13, 1998) in Peter Bevelin, “Seeking Wisdom: From Darwin to Munger” 264 (PCA Publications L.L.C. 2003) (2007).