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Every family wants to create a sound legacy for their children for the future, but too many skip the critical steps in the present to achieve those goals. And, it’s no simple matter. Business owners have a lot to think about when deciding when and how to transfer their assets to the next generation. What happens if your heirs have different needs, talents, goals, or levels of involvement in the family’s business? How you approach legacy and succession planning today could impact the long-term survival of your business as well as affect the well being those you hold most dear.

Your Estate Plan vs. Your Legacy Plan

When a client hears the term “estate planning,” they often think of money. Their thoughts turn towards completing wills, trusts, and other tools that will come into play upon their death. These are all vital documents that everyone should have, but they aren’t the same thing as a legacy.

Your “legacy” is what you want to carry forward into future generations. It represents values, family stories, and other ideals that you’d like to leave behind. These are key points to internalize as you think about how you’ll build a plan that will be true to your desired legacy.

Why Your Vision Should Drive Your Plan

One of the issues that we commonly see in the financial planning universe is the discussion of tools and tactics. Elaborate trusts, ownership and tax strategies are fun to learn about, but they are too often used to drive the legacy of a family or a family business.

Many advisors take a few techniques, which can be quite useful in the right situation, and try to apply them to nearly every situation. It’s like they only have a hammer, so everything begins looking like a nail to them. And that’s the problem – clients end up with a plan driven by tools, not the values and vision they have for their legacy and the family business.

So, how can you get this right? Start with the end in mind – have a clear understanding of what the vision is for your business or family, as well as the family’s values, and let those drive the entire planning process (not the tools and techniques.)

Can’t You Just Split Everything Equally?

The statistics on family business survival post-succession aren’t encouraging. According to the Family Business Alliance, just over 30% of family-owned businesses survive into the second generation, and just 12% are still running strong into the third generation.

The disconnect seems to be a lack of effective planning, but there’s a misconception that just any boilerplate succession plan is going to suffice. This is far from reality.

A common declaration we hear from clients is, “I love my children equally, so everything will be split equally among them.” This makes sense on the surface, but many business owners simply don’t know how to create anything different. They expect that their kids will sort things out amongst themselves. Unfortunately, when some children are involved in the business, and others aren’t, it creates an inequitable legacy and can lead to resentment.

Let’s look at an example of a large family-owned manufacturing business we recently encountered. The owners have three sons. Two of the sons (Bob and Tom) are heavily involved in the day-to-day running of the business, and the third (Ed) is a dentist in California.

This is very much a family business, and the goal is to keep it that way, as well as for all three children to be treated equally. So, the owners’ wills split all of the wealth, including ownership in the company in three equal shares.

Unfortunately, what would happen going forward isn’t equitable and doesn’t reflect the values of the family. Ed, the dentist in California, would now collect one-third of the profits for a company that he doesn’t help run, and the other two brothers either miss out on gains or struggle to come up with the money to buy Ed out. Hard feelings ensue and, if the situation is dire enough, the business becomes one of those statistics that doesn’t make it past the second generation.

The Case for Intelligent Estate Equalization

Instead of taking a boilerplate approach to succession planning, we encourage you to step back and assess your values and objectives first. We want to understand where you’d like to see your business once you step aside as well as learn about the goals of your heirs. What’s important to them, and will they participate in running the business?

With your vision in mind, we can craft what we refer to as intelligent estate equalization. This allows us to match your values with the legacy plan.

Using the same example from earlier, we’d propose Bob and Tom inherit the entire business because they have been running it, and this is something they want. Ed, the dentist, won’t get any share in the company but will instead get other assets that make him an equal heir.

Since most of “value” in an estate of this type is often held in the business itself, we use other tools to achieve equalization. For example, a legacy trust can help the heirs minimize taxation and there are a variety of trust-owned strategies to leverage your dollars and create the outcome you’ve envisioned.

In the example we’ve outlined, this type of legacy plan passes the value of the business to heirs who will help ensure its success without neglecting any heirs not involved with the business, all while keeping estate and tax strategy in mind.

Moving Forward with the Right Legacy & Succession Plan

Thoughtful legacy planning strategies that respects your vision and values will help ensure that your estate is distributed the way you choose. And as we’ve seen here, this is particularly vital when a majority of your assets are tied up in business equity and some, but not all, of your children have an interest in the family business.

Even if you already have a will and estate plan in place, you may need additional planning to ensure that you achieve the legacy you intend. The example we provided assumes several variables, but intelligent estate equalization can be used in any scenario.

Alterra Advisors - Josh Whelan

Grant Monson

CFP®, CLU®, ChFC®
Partner, Financial Advisor

About the Author

Grant grew up on a working wheat farm in eastern Washington. Today, he credits his family – who still manage the farm – for preparing him to build a business serving others. His vision to lead Alterra is built on relentless dedication to the success of his clients and the team – his extended family.

Grant’s dad says that he hasn’t worked a day in his life because “it isn’t work when you love what you are doing.” When combined with his mom’s view that “helping others should be part of every day”, Grant’s view of financial planning comes into focus. Alterra Advisors is very much a reflection of Monson family values.

Grant earned a bachelor’s degree in business and a master’s in economics at Washington State University. He launched his own financial advising practice over a decade ago, an entrepreneurial quest has become one of the most impactful things in Grant’s life. He loves coordinating the complex financial lives of business owners, bringing a depth of understanding that is rooted in his family’s own experience.

The “Alterra” name was coined by joining the Latin roots “alter”, the origin of the word “altruism” with “terra” meaning earth or land. This name reflects the company philosophy of “clients before profits” and providing firmly grounded advice.