Succession Plan (Chicken) or Estate Plan (Egg) – Which Comes First?
Dark Helmet: Ah, planet Druidia. And under that air shield, ten thousand years of fresh air. 
We must get through that air shield!
Colonel Sandurz: We will, sir. Once we kidnap the princess, we can force her father, King Roland, to give us the combination to the air shield, thereby destroying Planet Druidia and saving Planet Spaceballs.
Dark Helmet: [to camera] Everybody got that? From Spaceballs the Movie – Mel Brooks
When I am in an initial meeting on succession/estate planning listening to the current “plan,” I can’t help but feel like I am in this defining scene from Spaceballs. The plan seems pretty clear but soon, succession and estate planning concepts become intertwined. Then, you ask – what you think – is a simple question for clarification and you are in OMG territory. I am beginning to think there is a root cause for this; owners have difficulty determining the right way to address these complimentary yet at times, conflicting processes. Dealing with the desire to avoid the dreaded estate tax burden at all costs, estate planning seems to trump succession planning when it comes to priorities. Throw in the fact that few realize that there is such a thing as a succession planning process and voila, the more visible and popular estate plan becomes “Numero Uno” in the priority parade.
When an operating company is the primary asset in an owner’s portfolio, nothing is more important than the sustainability of that asset and succession planning is an integral part achieving that goal. So, how does one get in trouble here? The simple answer is placing wealth planning ahead of the operating business. In one of my cases, the bulk of the ownership was placed in a trust. The only problem was when the owner had to recruit a next generation CEO and in so doing, needed to get a portion of that ownership to that next generation leader. As a client of mine used to say – “says easy, does hard.” When promises of ownership have been made to heirs, breaking the bad news about dilution does not go over very well.
Another common mistake is the sibling rivalry issue. An estate planner suggests significant ownership of the operating company be placed in trusts and the parent(s) opt to spread the wealth equally among the children. Nice plan; but what do you do when one or more of those siblings are working in the business and in fact, may be responsible for substantially increasing its value? Is it fair for all to get an equal share of the economic value when those outside the business take no risk at all?
So, what is the answer? Very simply, succession planning has to trump estate planning… especially where family is involved. I use the standard organization/ownership/family chart overlay to make sure all are in parity with what an owner needs to do to satisfy each of those stakeholders. There are techniques which can be used to solve this problem if you consider these constraints before committing to any plan. A well-thought-out succession plan results in increased and ongoing value to the engine of growth that the estate plan can then be designed to protect.
