Don’t overlook these three critical transition-planning issues

This article was co-authored by Paul Lally, partner at our affiliate Wipfli LLP.

Transition planning for family business owners is one of the most talked about and perhaps the least well-executed areas of planning. The reasons, or sometimes the excuses, are numerous.

One clear reason is that crucial areas of planning and execution are simply missed in the transition process. “Transition planning” is not just about “planning” — it’s also about executing that plan.

Defining transition planning

Let’s be clear on how we define transition planning. Transition planning can mean different things to different people, but it is ultimately planning for the eventual transition of the control and ownership of a business due to the incapacity, death or retirement of the business owner.

Many planners/commentators tend to focus on retirement, but there must also be a plan to deal with the unexpected death or incapacity of the owner. Such events are much more likely to cause chaos in the business than the planned retirement of the owner. As a result, transition planning should be seen as more of a “continuity plan” for the business and family wealth rather than an end point for the owner at retirement.

What many business owners often overlook

There are a few significant considerations that many business owners often overlook. Part of the reason may be that the entire process can seem overwhelming for business owners. Another part of the reason is that many transition-planning advisors don’t have the expertise and ability to help business owners in all of these areas.

Nevertheless, business owners need to consider the following critical needs as part of their transition-planning process:

Creating an emergency plan for today: If the owner becomes incapacitated or dies unexpectedly today, is there a plan in place to keep the company operating as smoothly as possible?

This issue is often overlooked by many commentators and planners because they are often focused on retirement in the future. If there is no plan for an owner’s unexpected death or incapacity, then the value of the business could be severely impaired.

If there are other owners, then a buy-sell agreement should be helpful to cover the next steps. If there is no buy-sell agreement or there is only one owner, then the owner, the owner’s spouse and the management team need to have a plan in place for such occasions — a plan that is regularly reviewed and updated.

Performing comprehensive financial planning: The family business often represents the vast majority of a family’s wealth. Too often, business owners and their advisors just focus on the mechanics and structure of transitioning the business entity to their children or third parties, even though the owner is typically depending on the sale of the business to maintain their current lifestyle through the remainder of their lifetime.

We believe that transition planning for a business should include comprehensive financial planning so that the business owner can understand the total financial impact of the options being considered. This is the only way that an owner can fully understand the complete impact of the decisions being made.

For example, a sale to a child often includes the business owner being paid the purchase price on a promissory note over a period of years. A financial plan will specifically help the owner determine whether the annual note payments are sufficient for their cash needs with their other sources of income, the tax impact of the installment sale, the impact on cash flow needs when the note term ends, etc.

In addition, a financial plan looking at the overall net worth of the business owner can help the owner determine whether they have estate tax exposure at death. If so, gifts of corporate stock or LLC interests to children or trusts for their benefit may be appropriate before sale to take advantage of discounts inherent in corporate stock or LLC interests. A financial plan can help the owner model the different options available and the impact on their own cash flow of the gifts being considered.

Including continuation/transition-planning provisions in the estate plan: The best transition plan can be meaningless if the plan isn’t incorporated into the business owner’s estate plan and relevant corporate documents. The estate plan includes the legal documents naming those people who have authority to act on behalf of the business owner and the business at the owner’s incapacity or death. Unfortunately, this is often overlooked as a key component in the execution of a transition plan.

Here’s an example of how a transition plan must be coordinated with an estate plan:

  • Owner’s intentions: A business owner with multiple children wants the only child involved in the business to manage the business upon the owner’s incapacity or death.
  • Planning completed: The owner has a written continuation plan that creates a board of advisors to help the child manage the business. However, none of the provisions end up in the estate plan. Instead, the owner’s generic estate plan provides that the assets passing to the children at the owner’s death are held in trust with a bank as trustee. No specific mention is made about the business entity and its management.
  • Upon the owner’s death: The bank trustee steps into the owner’s role and decides to have a non-family member employee manage the company on their behalf because the other children (who are also trust beneficiaries) objected to the owner’s plan. These results could obviously have been avoided if the owner’s plan was incorporated properly into the estate plan.

There are a lot of personal, financial, tax and other considerations that go into a transition plan. It can seem overwhelming to business owners. However, to ensure the success of the plan, it’s critical that the business owner has their entire financial picture in mind when assessing their transition options and that the final plan is executed in coordination with the owner’s estate plan.

If you’d like to discuss your options when it comes to transition planning, financial planning and estate planning, reach out to a Wipfli Financial advisor:

Critical transition-planning issues


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Dean Stange

J.D., CFP® | Principal, Senior Financial Advisor

Dean Stange, J.D., CFP®, is a Principal and Senior Financial Advisor with Wipfli Financial Advisors in Madison, WI. As an attorney, Dean has provided estate and succession planning advice to business owners for more than 20 years. He primarily focuses on the ways in which business ownership, tax and estate issues can impact long-term financial planning.

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Don’t overlook these three critical transition-planning issues

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