Succession planning: Does any term spark more fear and trembling in the mightiest business baron? The thought of stepping down from the pinnacle of power causes such dread that most managers put off planning for smooth leadership transitions.
The reasons for such apprehension are obvious. Designing a succession program demands not only time and effort, but also sensitivity. Understanding the psychology of the people affected by a transition seems as important as knowing the intricacies of accounting rules and tax laws.
And, of course, planning for one’s own departure strikes unpleasant vibes. "Many people are unwilling to address an issue that is tied up with their own mortality," says William J. Rothwell, a professor of human resource development at The Pennsylvania State University, State College, Penn. "It’s like getting a phone call from someone who wants to sell you a tombstone."
That’s not all: Doing the job right means involving everyone likely to be affected by the changeover. That can be traumatic. Individuals will have conflicting expectations of their positions once current ownership changes. Especially in a family business, the topic of transition can open old wounds you may like to think have healed forever.
Do The Right Thing
Failing to plan adequately for the death of a business owner can have tragic consequences. When the time for transition comes, hurt feelings can scuttle the smooth operation of the business. Furthermore, unanticipated federal and state inheritance taxes can be so severe that the business may need to liquidate to pay the debt. There’s a lot at stake, and successful business owners will take a proactive stance.
"As an employer, you need to get your act together now," cautions Rothwell. "Systematically develop your own workforce to meet your future needs internally. You need to take advantage of the talent you have right now and build it so you are ready to seamlessly hand off power at the right time."
Rothwell’s key point is this: While we tend to concentrate on the traumatic event of a change in business ownership, it’s smarter to take a wider view of succession planning. It’s really an ongoing process in which you anticipate and plan for the retirement or departure of important individuals throughout your business.
The term "succession planning" can actually be misleading, says Rothwell, because it implies leadership change is set in stone rather than a dynamic process, the details of which will change as key personnel leave the business. "The term ‘succession planning’ seems to guarantee or promise people a promotion," he says. "It tends to communicate that management has decided among themselves what will happen, without input from the staff." A better term, he says, is "leadership development" which communicates the desire of the business to develop the management skills of many individuals.
Rothwell’s suggestion is to project the estimated retirement dates of key individuals in your whole workforce. Then analyze the areas of greatest risk to the healthy continuation of your business. The results are often surprising. Succession planning, then, involves a two-level process. First, there is the immediate need to establish a plan for transition when the current ownership retires. Just as important, though, is the need to have an organic and ever-developing system that will anticipate the departure of important players at all levels.
The tax consequences of business succession deserve special attention. As do many other countries, the United States levies a tax on property passed along at the owner’s death. The term "estate tax" refers to a levy against a property prior to transfer, while an "inheritance tax" often refers to that which is levied on the individual receiving property from the estate. From the standpoint of financial planning, working in tandem with these taxes is the "gift tax." This is intended to prevent large estates from avoiding taxation by lifetime giving. Finally, there’s one more level of complication: states have their own estate taxes that come into play along the federal versions.
There is good news — the tax laws are changing to allow more liberal transfer of assets. You’ll find a schedule of such changes on the Web site of the IRS, mentioned later in this article. Suffice it here to state one key point: reductions to federal estate, gift and generation-skipping transfer taxes are gradual over the next seven years.
Seek Outside Help
When it comes to designing a workable plan that everyone can accept, it’s smart to seek outside assistance. There is plenty of help around for those who look. If you already have a trusted financial advisor, that individual may have a background in estate planning and can put in place a program that will preserve your business assets. If you are seeking a good advisor, your bank may make a recommendation.
What if your current advisors aren’t knowledgeable about this specialized area? You aren’t alone. There is a wealth of information out there on the Internet, from lists of attorneys and consultants specializing in the field to the latest news on tax law changes. Even if you have an experienced advisor, it’s helpful to peruse this information so you know what questions to ask.
1. The Estate Planning Links. No contest: Here’s the best portal to Web sites of succession planning information. There are scores of links here, from consultants in the field to advice and published stories on taxation.
Point your browser to www.estateplanninglinks.com and review the offerings. Make a point to click on the "Bookstore" link at the upper left.
2. The Family Firm Institute. This is a great resource for finding consultants who will help with both the psychological and financial aspects of succession planning. You’ll find this organization’s Web site at www.ffi.org. Click on "Consultants and Speakers" at the left side of the screen for direct access to a useful search engine.
3. The Legal Information Institute. Kudos to Cornell Law School for putting together this site outlining key legislation and recent court decisions. When you’re seeking information about a particular legal wrinkle in the estate and succession planning fabric, the place to go is www.law.cornell.edu.
Once at the site, click on "Law About…" in the menu to the left. Click on "Taxation" in the submenu and you’ll see a link to "Estate and Gift Tax." Now you’ll go to a page with great links to federal and state resources as well as links to the laws that relate to the Federal Estate Tax (the Internal Revenue Code. 26 U.S.C. 2001) and the Federal Gift Tax (26 U.S.C. 2501.)
4. Forbes Estate Planning. Visit www.forbes.com/estate_planning for continually updated news about the field. It includes contributions by leading business people and links to other financial information.
5. Internal Revenue Service. At www.irs.ustreas.gov, click on "Businesses" at the lower left side of the screen, then on "Estate and Gift Taxes." This takes you to a screen with many links to the latest tax law changes in the subject area. The information on this site clarifies some of the fine points on such matters as annual exclusions and annual tax rates.
If there’s any one message shared by all of these sources, it’s that the wise business owner takes steps early to plan for a smooth business transition. As difficult as it is, succession planning must be approached. The time required can be reduced considerably by leveraging the services of your accountant, attorney and other outside experts.