Which Comes First: Estate Planning or Exit Planning

Posted on Tuesday, July 25th, 2017

While there isn’t one right answer, owners who see that Exit Planning and Estate Planning share the same goals begin to appreciate how they can leverage the time and money they spend on their Exit Plans into the design of their Estate Plans. To help make the choice about where to start, we urge owners to consider two issues: (a) Estate taxes are (currently) easier to avoid than income taxes, and (b) Estate Planning techniques often involve funding from life insurance proceeds, whereas Exit Planning techniques often involve the owner’s own funds.

A successful business Exit Plan achieves three important owner goals:

  1. Financial Security: The business sale or transfer provides the amount of income the owner and owner’s family need after the owner’s exit.
  2. The Right Person: The owner chooses his or her successor (children, key employees, co-owners, or a third party).
  3. Income-Tax Minimization: The owner minimizes the amount of cash the government takes out of his or her pocket.

A successful Estate Plan achieves three important personal goals:

  1. Financial Security: For the decedent’s heirs.
  2. The Right Person: The decedent (rather than the state) chooses who receives his or her estate assets.
  3. Estate-Tax Minimization: Reduces the government’s bite, leaving more funds for the decedent’s heirs.

Once owners see that the two processes share the same goals, they can appreciate how to leverage the time and money they spend developing their Exit Plans into the design of their Estate Plans.

For example, when owners engage in Exit Planning, they most likely determine their objectives and secure an estimate of value on their businesses before they start working to create greater business value. In securing an estimate of value, owners possess a piece of information that’s critical to both their business-continuity plans and Estate Plans.

Thinking of Exit and Estate Planning in tandem allows owners to ask relevant questions to bring their entire picture into focus:

  • If an owner does not exit the business on the planned business-exit date, how will the owner provide his or her family with the same income stream the family would have enjoyed if he or she had?
  • How can an owner make sure that his or her business retains its previously determined value?
  • Regardless of whether an owner’s Exit Plan involves transferring part of the business to his or her children, does the owner’s Estate Plan reflect and implement his or her wishes if he or she does not survive?
  • If an owner dies before exiting the business, can he or she be certain that his or her family will still receive the full value of the business? (This question is especially important to answer for sole owners. Sole owners are unlikely to have a buy-sell agreement because there are no remaining co-owners to purchase and/or continue the business.)

While Estate Plans can manage these issues, owners must determine whether their Estate Plans address these issues.

Another goal of The BEI Seven Step Exit Planning Process™ is to protect assets from creditor attack during an owner’s lifetime and minimize tax consequences upon a transfer of ownership. Owners must ask themselves the following: Does my Estate Plan work to minimize creditor risk for both me and my heirs? It is possible to achieve these goals through both Exit and Estate Plans.

It is worth repeating that owners must devote the same energy and analysis to lifetime transfers (benefiting themselves) as they do to a transfer occurring at their death (benefiting their families). Since planning exits from both business and life are based on the same premises, it can be relatively easy to develop a consistent outcome.

The following two facts may help owners determine which plan to undertake first:

  1. Estate taxes are easier to avoid than income taxes.
  2. Estate Planning techniques often involve funding from life insurance proceeds (which pay in cash upon death), whereas Exit Planning techniques often involve the owner’s own funds (accumulated over decades).

There isn’t one categorically correct answer to the “Estate or Exit Planning?” question. In the end, owners must act on both fronts, since a failure to act in either case creates lasting problems not only for owners but also for their businesses and families.

We can help you decide which plan to approach first. Contact us today to get started.

The information contained in this article is general in nature and is not legal, tax, or financial advice. For information regarding your particular situation, contact an attorney, or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax, or financial advice. In specific cases, clients should consult their legal, accounting, tax, or financial advisor. This article is not intended to give advice or to represent our firm as qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we always will work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc. and presented to you by our firm. We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.