While knowing to whom a role will pass in the wake of one of these events is key, it’s not sufficient. There is a financial aspect that must be addressed in order to ensure that the firm will be able to maintain operations going forward.
To that end, there are three main categories of succession events your firm should be prepared for: voluntary departure (i.e., retirement), death and disability. In a complete succession plan, you firm must address each of these categories and their corresponding financial needs.
This is succession planning in its purest form. There are many items to be address in a voluntary departure, but from a financial perspective these items are relatively simple. The departing partner will need to be able to replace their income in order to leave. The firm’s role in this part of the planning centers on 401(k), profit-sharing, and top-hat plans to assist in preparing for the departure.
Transfer of ownership interest also needs to be addressed, as well as any potential residual income from client relationships that were developed by the departing partner. The firm should also detail these items in the partnership agreement well in advance of an actual departure to ensure everyone knows what will happen at the separation date.
The unexpected passing of a partner causes a host of issues that need to be dealt with at a time when the survivors are often emotionally compromised. Planning for these events in advance will help alleviate much of the stress.
From a financial perspective, the firm must replace the income previously generated by the deceased partner, as well as potentially fund a buyout of the individual’s ownership interest and equity position. This is most often addressed with life insurance.
Your implemented plan can help preserve the loyalty and support of employees, clients and creditors during and after the ownership transition — an incalculable value that will certainly affect the firm’s financial future immeasurably.
There are many types of life insurance that can be used, each with benefits and drawbacks. We recommend using the services of a life insurance agent who is familiar with the ins and outs of succession planning to avoid making mistakes in setting up the policies ― both in providing the correct amount of insurance and the administrative setup. The most common error we see when implementing these types of life insurance policies involves not setting up the ownership of the policies correctly. An incorrect setup can cause the proceeds of the policies to be taxable, whereas a proper setup will make the proceeds tax-free.