Succession Planning for Community Banks

In lieu of our Succession Planning for Community Banks WEBINAR on September 3 at 10am CDT, below is the whitepaper on the same topic. Please CONTACT US if you have questions or comments regarding succession planning for community banks. You may also download a print-friendly version of the paper HERE.

Succession Planning for Banks and Businesses

R. David Fritz Jr., CLU®- Managing Partner and Patrick J. Marget, JD, CPA, CFP®, CLU®- Managing Director, Executive Benefits Network; Joseph M. Maier, JD, CLU®, EPLS, AEP®- Attorney at Law

Executive Summary

You are gone tomorrow. What happens to the business you poured years of your life into? Will your family or an outside buyer take over the business? What income will your loved ones use to survive? A detailed, well communicated business succession plan provides answers and involves four parts:

I. Leadership Succession– Who is Going to Steer the Ship

First is leadership succession– who is going to steer the ship. It is the most important objective, because without leadership succession, the other parts of the plan become irrelevant.

Having the right person to run the business and maximize its value is critical. If it is a family member, the succession of leadership is incorporated into the overall estate plan. If the successor is an employee or another current owner, buy/sell planning is used. If the business will be run by an outsider (competitor or professional private equity company), then the sale of the business is used.

After determining who should run the business, determine if this person should also own the business. Generally, the answer is “Yes”.

II. Estate Planning—Tax Friendly Options

The second step is to develop the estate plan, which is a strategy to take care of the people you care about. This is done in two ways: (1) transferring the right property to the right people at the right time, and (2) making sure the right people are making decisions when you cannot.

Part of making sure the right people get the right property is to make sure your property (including your business) is going to the desired recipients and not to the government or creditors. For this reason, tax planning and asset protection planning are critical components of a succession plan.

Business owners that want to give a highly valuable business to a successor will find the estate tax to be an obstacle. A couple that works together and builds an estate tax sensitive plan can essentially pass a $10.7 million business to someone without concerning themselves with the estate tax. However, if they are trying to pass a $25 million business to someone, the estate tax system will tax every dollar of value in excess of $10.7 million at a 40% rate. The result: cash will be needed ($6 million to be precise) within 90 days of death to pay the estate tax.

Tools that help resolve estate tax issues are numerous: trust, buy/sell arrangement, life insurance, lease, charitable planning, etc. These tools help to coordinate the right people, the right property and the right timing– allowing the business owner time to focus on retirement and the people he or she cares about.

III. Retirement Planning—Money, Money, Money

The third step is retirement planning. Some business owners place no priority on retirement planning and cannot foresee themselves not involved in the business. Other business owners want to leave the business for their own peace of mind or for the good of the business to be run by fresh blood.

Most closely held business owners reinvest all of the business’ profits back into the business. This can be a challenge, because the only source of retirement income is the business itself. But the businesses’ income also has to provide for the new owner as well as future expansion and reinvestment.

Oftentimes, business owners are so frustrated when it comes time to retire that their business focused retirement plan gets in the way of successful business ownership succession. In other words, the successor is less excited to take over and run a business burdened by the previous owner’s retirement needs.

Early savings for retirement outside of the business is important. Outside investments will give the business owner something incredibly valuable: choices. The owner will be glad for these choices when retiring and when transitioning leadership.

IV. Harmony—How to “Keep the Peace”

Business owners need to be honest with themselves in leadership succession. Picking the right leader is critical, and it is the only way to maintain the lifestyles of those we care about. If that right person is only one of the three children, then the parents need to give ownership to that child.

Business owners also need to determine what people WANT when putting the plan together. Harmony is maximized when everyone is happy, and people tend to be happy when they get what they want. Decide if the person already working at the business wants to take it over, and if the uninvolved persons just want cash.

Life insurance can be a great tool to “equalize” the estate, get everyone what they want (i.e.: uninvolved get income tax free cash), and help the current business owner(s) make the right decisions.

It is fair to leave the more valuable business interests to the person who is adding to that value and taking on the risk. The most successful succession plans focus on what people want and what is fair, and they disregard the math problem focused on equality.

Moral of the Story

Have a plan that incorporates everyone from start to finish. This will lessen the likelihood of infighting, while keeping key employees and clients from looking elsewhere. Working with an experienced team of trusted attorneys, CPA’s, financial advisors and bankers will make this process significantly smoother.

A business succession plan, much like a financial plan, should be reviewed and revised periodically. Life is not stagnant, and changes will need to be made to stay current with your goals and dreams. Thinking of your succession plan in your head will not provide the options and outcomes that you desire, so communication is crucial.

In summary:
• Communicate. A plan is no good is if no one knows it exists.
• Do not separate ownership and leadership.
• Trusts, buy/sell arrangements, leases, life insurance, charitable planning, etc. are tools that can help resolve estate tax issues.
• Investing outside the business will give the owner choices when retirement and ownership changes occur.
• Focus on what people want and what is right for the business.

R. David Fritz Jr., CLU®, Patrick J. Marget, JD, CPA, CFP®, CLU® and Joseph M. Maier, JD, CLU®, EPLS, AEP® welcome questions and comments. Please contact David at (414) 431-9688 or, Pat at (414) 431-9681 or and Joe at (414) 276-5000 or

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