198 – Creating a Great Succession Plan To Preserve Generational Wealth with Steven Goodman

Synopsis

A business succession plan may not be the first thing on the mind of real estate investors, especially as they’re still working to grow their portfolio. But it is important to make sure you can preserve your wealth for the next generation. Steve from SHG Planning, a consulting firm involved in business succession planning, wealth accumulation, and wealth preservation, is here today to tell us all about creating a succession plan.

Key points

Without estate planning, a person’s assets can take a huge loss through taxes, litigations, and creditors going after heirs. An unattractive task often avoided by people and also prone to becoming a complicated process, there are some key steps to get things started.

The First Thing You Need To Do

Make sure your chosen successor wants to be the successor. In some families with family businesses, children feel obligated to work in the business. But they may not really want to take over the business in the future.

Why People Avoid Succession Planning

It is often hard to get people to do something today that is for their future. People are more preoccupied with putting down fires.

There could also be an emotional reason. Children are good at playing their parents against each other. While most parents try to love them equally, sometimes they don’t want to pass the business to the child who is not working in the business.

At the end of the day, people would rather not upset the apple cart, and let their heirs figure it out after they’ve passed.

The Cons Of Not Having A Succession Plan

Intestate succession will be applied if a person dies without a will. This would result in excess taxes and ultimately lead to family conflict.

Some are able to plan accordingly allowing their assets to pass through their heirs without going through probate, such as a trust.

Reasons Why People Avoid Probate

During probate, information is put out in public. This can lead to some privacy issues for those who would like to keep information within the family.

Another reason is that fees are minimized by not going through probate. A huge estate could be slapped with a huge tax bill that the heirs have no choice but to allow the estate to sell the assets to become liquid and pay off the taxes due.

The Succession Planning Process

The process involves having a whole team working together. Typically, there would be a CPA, a tax lawyer, a financial adviser, and a consultant, like Steve.

There are questions to consider during the planning stage. A donor may decide to give some ownership while still alive by giving a limited partnership interest to his heir. A property that has a part of it already owned by someone else makes it much less marketable. This would make it more difficult to sell, so the property could be valued less resulting in a lower tax.

Parents could also put in place something that could break a deadlock if and when their two children who will co-own a property are not able to come to an agreement.

Provisions could also be put to protect one sibling from being taken advantage of by the two other siblings.

The Timeline For Completing A Succession Plan

For some people, it could take years to get it done due to constantly postponing meetings, or when people can’t make up their minds, so the momentum is not kept up.

But on average, it could take 6 months to complete the succession plan.

Changing Or Updating Wills

As long as both parties are informed, a husband or a wife can change their will anytime. Complications happen when someone who was previously named a trustee was later no longer included when the first trust is dissolved and a new one put up. They might make a claim against the trust.

Some of the things are not that easy to unwind, but they can be and would take a couple of months.

A person could constantly update their will and even use a different lawyer each time. For convenience, the new lawyer should report to the prior lawyer that the will they have on file is no longer valid. In cases when there are multiple wills, the will with the latest date will be the one considered as the last will.

Succession Planning Costs

Costs for a simple will drafted would be around $1,000. But for more sophisticated planning, it could range between $10,000-50,000. A good ballpark amount is between $5,000-20,000 for the will.

But there are other expenses involved such as the appraisals, which costs tens of thousands of dollars, life insurance, and the fees for other members of the team such as the CPA.

Despite all the costs involved, what you’d shell out will pale in comparison to the extra taxes and litigation that could happen if succession planning isn’t done.

The Typical Client Profile

When it comes to succession planning, we often picture it done by older people who have already built wealth. Most clients of Steve are those worth millions of dollars and have family. Some are in real estate, and some have operational businesses.

But people who are in their 30-40s who have significant wealth can also consider succession planning, especially for those who are married and with kids. Succession planning can help them preserve their wealth for the next generation.

Wealth Preservation Strategies

Wealth preservation often involves asset protection. It could through putting up limited liability companies (LLCs) to minimize taxes or through putting things up in trust.

A trust has many benefits. A lawyer could be designated as the trustee thereby removing any pressure that could be placed upon the beneficiary by a spouse.

Estate Tax Exemptions

Until 2026, there is a federal estate tax exemption of $11.5 million per donor. Theoretically, you can leave up to $23 million to your children that will be exempt from federal estate tax. After 2026, it will revert back to $5 million per donor or a total of $10 million.

In cases when the first spouse to pass away wasn’t able to use the full exemption, there is a provision that allows the unused exemption to be carried over to the surviving spouse.

Common Mistakes

One of the most common mistakes done by people is not doing any succession planning. They leave their assets unprotected and their heirs to pay for the costs of the taxes, lawsuits, etc.

Another mistake is never updating their will from when it was made while their children were babies.

Giving things outright to their kids during their lifetime and not tying in up in trust is also a mistake often done. This means that they did not think about conflict their kids could face, or they didn’t think about the conflict that could occur between siblings.

Resources

References

• IRS Estate Tax Exemption

More from our guest

• Get a copy of Steven Goodman’s book “Business Succession Planning”.
• You can also access the free resources available at SHG Planning.
• Connect with Steve by sending him an email at sgoodman@shgplanning.com or calling him at (516) 297-7390.