FPC005 Estate and Succession Planning Assessment Answer

Succession Planning Risks

Strategic Risks

Charles is the proud owner of a mechanical company that produces components for the mining industry. The ownership of the company is held in a family trust. It has been twenty-five years since he established the company. In the midst of her studies at the university, Marie began working for the company. During that time, she was concentrating her studies on mechanical engineering. She has recently been given the responsibility of developing new items for the company. She is responsible for the creation of several one-of-a-kind pieces, which are now protected by trademarks and account for well over half of the company's revenue (Siambi, 2022).

Control Risks

Every business owner should include a succession plan as an essential component of their estate plan since it removes the element of uncertainty regarding the future of the company. The customers might want to hand the company over to another person while they are still living, in which case they might begin cultivating and educating key workers or family members as soon as possible. A business can plan for tax debt and the transfer of assets after death, as well as ensure that its income is balanced and that it maintains control over what is happening both in the present and in the future, using any one of a number of different methods. Without proper planning, a family-owned company runs the risk of being taken over by members of the family who are either unprepared to run it or do not choose to do so (Bano, Omar and Ismail 2022).

After a person has passed away, the estate must go through the probate process so that the court can oversee how their property is distributed. Depending on the size and type of the estate and whether or not the person left a will, it can be hard and expensive. Trusts, both revocable and irrevocable, are a common way for people to arrange for their estates in a way that keeps the court out of the picture when they pass away. This is an increasingly common practice. Instead, the person who owns the property or is the "trustor" transfers the property or assets into a separate legal company. This can be done for a number of reasons. On the other hand, certain kinds of assets, such as commercial interests, can be documented in such a way that they will be transferred to another person upon the death of the owner without the need for consent from the court (Lusardi 2019).

Family firms, in comparison to enterprises that are not run by the same family, have proven to be more resilient in the face of systemic shifts. Businesses that are operated by families tend to be more innovative and enterprising than those that are not run by families, and the values, culture, and ethos of these businesses tend to be far more robust. Family enterprises have shown resilient in the face of shifting business environments both at home and overseas. They are also courageous and have the ability to cope with issues that arise in the corporate and economic world. But family businesses must contend with two challenges: first, they must operate in an extremely challenging economic environment worldwide, and second, they must determine how to hand the company down from one generation to the next. The majority of family businesses only survive for three generations, despite the fact that their owners are ambitious and have a good mindset.

Compliance Risks

According to the Responsible Lending Principles, financial institutions have a responsibility to their customers to give them with comprehensive information regarding the potential applications of their products and the accompanying expenses that are associated with those applications. This obligation extends both to the goods themselves as well as to the prices that are associated with those potential applications. The objective of providing potential borrowers with access to this information is to provide them with the knowledge that will enable them to make an informed decision regarding whether or not they should take on further debt. This suggests that discussions concerning adjustments in the plan ought to be of a succinct nature and ought to be kept to a minimum. If it is not possible to provide the customer with information regarding the type of help they are seeking for in a timely manner, then it should be supplied as soon as possible after the event has taken place (Bano, Omar and Ismail 2022).

The case study that was just presented included a step in the process that involved obtaining pertinent personal information from participants. The Act mandates that all reporting entities comply with specific legal responsibilities, and the authorities in charge of regulating the industry have created guidelines and codes of practice to make it simpler for businesses to meet their commitments in this area. The following is a list of specific proposals or recommendations that have been made. Senior stakeholders almost always place pressure on compliance managers to report on compliance risks and controls in a time frame that is as close to real-time as is practically practicable. Compliance managers are responsible for ensuring that their organizations are in conformity with relevant laws and regulations. Because compliance programs often involve a significant number of unique offices and duties, it is possible that it will be difficult to complete all of these standards. This is because of the nature of compliance programs. It is immediately more difficult to record a corporation's financial information when the corporation operates in more than one country (Siambi, 2022).

It is probable that, in a circumstance such as this one, it would be good to make use of tools that are geared for the preparation of more intricate reports. Utilizing graphical screens allows compliance managers to gain a clear comprehension of the entirety of the process of compliance risk management. This is possible because of the visual nature of the screens. These dashboards might, for instance, include compiled information as well as trackers for each person's current state. The viewers are supplied with risk information in both its historical and its real-time versions, allowing them the opportunity to decide whatever form of presentation best matches their requirements. Examples of this kind of information include an analysis of controls and the outcomes of risk assessments. As a result of receiving these insights, compliance managers now have the capacity to always be aware of what is going on the ground and how their compliance risk management program is progressing. This is a significant improvement over the previous situation. Automated warnings of events such as failures and exceptions are a tremendous help in terms of lowering the total number of unanticipated occurrences and improving the dependability of the compliance process. Numerous financial institutions are looking at the prospect of discovering and forecasting compliance concerns through the utilization of advanced analytics and machine learning. This is being done in an effort to meet regulatory requirements. If those responsible for making decisions have access to risk insights that are faster, better, and more in-depth, they will be able to notice possible blind spots in compliance more quickly and rectify them before the situation becomes more severe.

Contingency and Planning Risks

Sonya and Charles should be aware not just of who leads the company but also of what their active and inactive responsibilities are as well as the manner in which they report to the CEO if they have a sound succession plan. In addition to this, it ought to establish a mechanism to make decisions and a way to settle arguments between members of the group. Keeping this in mind is especially essential for running a larger firm or running a business in which members of the same family work together. When financial institutions do a comprehensive examination of compliance risks across the organization, they are able to obtain a clear picture of the dangers that they are up against. The results of this review will demonstrate things like how likely it is that a certain compliance risk will occur, why it will occur, and how significant an effect it will have. Calculations of risk also make it simpler for organizations to analyze and rank compliance issues, relate these issues to the appropriate risk owners, select the most effective method for dealing with these issues, and use their resources in the most efficient manner possible.

A method of risk assessment that is articulated very clearly helps stakeholders comprehend not just the financial costs of compliance risk, but also the legal effects, the effects on company, and the effects on reputation. It is a significant step in achieving the objective of providing a more comprehensive view of risk to ensure that qualitative and quantitative risk metrics are in place. Another advantageous feature of an integrated data model for compliance is that it may illustrate the ways in which a risk is connected to other risks, controls, rules, policies, offices, and goals. Following an analysis and ranking of the various compliance risks, the most appropriate controls for preventing or locating those risks can then be selected. In the same vein, these controls need to be evaluated on a consistent basis to assess both the quality of their construction and the efficacy of their operation. This is done to ensure that they are functioning properly. Controls that pose a greater threat must be inspected more frequently and in more depth, whereas controls that pose a lesser threat may not require as much attention to detail.

The process of reviewing controls can be made more efficient through the use of compliance software tools that help to streamline and automate the process. The fact that some of the tools already have the criteria and check lists built up makes it significantly simpler to carry out reviews. In addition to this, they provide several methods for awarding points, tallying those points, and reporting the results. Using the compliance tool, any potential risk problems or exceptions that are discovered can be documented in the event that they are found. After that, a strategy can be devised to investigate the issue and come up with a solution to it. This strategy may be implemented an unlimited number of times until the underlying issue has been resolved.

Technical Risks

Frequently, a business holds paramount significance as the primary asset in the possession of its proprietor. The inclusion of a postmortem plan within the estate planning of the owner is imperative. Consider the potential implications on tax obligations in the event of selling an asset, altering its ownership, experiencing mortality, or undergoing a divorce. Prior to engaging in the sale of the land, it is advisable to carefully consider and evaluate various tax structures or plans that would effectively cater to your specific requirements, while concurrently minimizing the tax burden imposed (Siambi, 2022).

Numerous business proprietors hold the belief that their offspring or alternative successors will assume control of the enterprise in due course; however, it is imperative for them to also contemplate the recruitment of seasoned management personnel. In order to achieve future greatness, it is imperative that all employees within the organization cultivate a culture of honesty and open communication.

An employee stock ownership plan is a defined contribution employee benefit plan that is designed to invest in the stock of the company. This particular plan provides tax incentives to both employees and company proprietors.

When a business allocates funds towards an employee stock ownership plan (ESOP), it becomes eligible for a tax advantage, allowing the funds to be utilized for the acquisition of company shares. When shareholders transfer their shares to an Employee Stock Ownership Plan (ESOP), they are not immediately obligated to pay taxes on the capital gains resulting from the sale of their shares. In the majority of instances, employees are not required to make personal financial contributions, and any appreciation in the value of their shares remains untaxed. The Internal Revenue Service (IRS) establishes the annual limits for the maximum amount and percentage of eligible payroll that can be allocated for sale. However, shareholders have the freedom to sell varying amounts of stock at their discretion, and they have the flexibility to execute these transactions at their preferred rate. Trusts serve as an effective mechanism to ensure a consistent and reliable income stream for both the proprietor of a business and their spouse. A wide range of assets, including operational businesses, have the potential to be placed within a trust structure. Upon the expiration of the trust's duration, the assets contained therein may be distributed to the designated beneficiaries, who may encompass family members, charitable organizations, or other affiliated entities. Trusts are available in various forms and dimensions. Certain ownership structures afford the proprietor a degree of managerial authority while simultaneously facilitating the transfer of ownership to prospective buyers (Lusardi 2019).

Throughout their lifetime, business owners have the opportunity to strategically reduce the burden of estate taxes and transfer ownership of their business to family members. In many instances, assets are transferred from the taxable estate to other individuals during the duration of their ownership. Donations of a maximum amount of $15,000 per individual per annum are exempt from gift taxation, thereby reducing the taxable value of an estate.

Internal Risks

It is crucial to consider the structure of the organization while simultaneously adhering to the pre-established guidelines governing familial conduct. Many families opt for a Trust Structure due to its facilitation of intergenerational succession and potential mitigation of estate tax liabilities. The implementation of a Trust Structure may offer a safeguard for family assets against potential claims that may arise in the future due to business transactions or personal circumstances such as divorce. However, there remains ongoing debate regarding the feasibility and efficacy of employing health protection and preservation strategies. One of the primary inquiries individuals have is whether or not they can derive any benefits from the situation. An Estate and Succession Plan is necessary for a wide range of individuals, including non-resident Indians, business entities, individuals with substantial wealth, aspiring young entrepreneurs, parents who are making provisions for the future of their children with special needs or unique abilities, families of various structures such as blended, nuclear, and single-parent households, as well as all individuals in their daily lives.

One potential approach to address this issue involves posing the fundamental inquiry and ascertaining our preparedness for estate and succession planning. In recent years, the emergence of novel asset classes and the enactment of new legislation have underscored the significance of staying abreast of traditional and contemporary practices. Maintaining familiarity with both traditional and contemporary methodologies is of paramount significance. This practice is implemented to facilitate the continuous expansion of Estate Planning and Succession Planning into different domains (Siambi, 2022).

A mere fraction of the comprehensive process of estate planning entails the compilation of an inventory of one's assets and the subsequent determination of the manner in which they are to be distributed. The millennial generation should prioritize proactive planning to safeguard their wealth throughout their lifetime, establish objectives for wealth preservation, and ensure the creation of a lasting legacy for subsequent generations. Due to the significant presence of millennials and Generation Z within the overall population, it is imperative to reconsider traditional approaches to estate planning and succession arrangements following the demise of an individual. Trusts are increasingly gaining popularity as a means of managing and transferring family assets in a manner that is both convenient and efficient, while also incorporating a high degree of flexibility within the Estate and Succession plan. One factor contributing to the increasing popularity of trusts is as follows. There exist two distinct categories of trusts (Bano, Omar and Ismail 2022).

External Risks

When combined with a crisis, the sudden departure of a famous leader or someone with a mission-critical role would have a big effect on the organization and could even lead to its demise.

A business disruption can cause a number of bad things to happen, such as the end of projects or relationships with outside groups, poor financial results, a drop in sales or market share, and other similar things. When a person in a key position leaves or the position opens up suddenly, it can cause a lot of uncertainty and chaos in a company.

Without a formal succession planning process, a well-defined success profile, or a full list of possible successors, there is a risk that an internal or external candidate for a leadership post will not be the right one. This can happen whether the person being chosen to be the next leader is from inside or outside the company, when a job's selection process is based on subjective or one-sided criteria, it's possible to choose potential replacements who don't meet all the requirements. This statement is true whether the hiring is done from within the company or from the outside. This happens even more often when there is a pressing need to quickly fill a vacant job. If a person can't match up with the standards of a certain role, whether it's in terms of behaviour, cultural fit, or skills, it can hurt their job performance and their overall effectiveness. This could be about how well they did their job or how well they did it.

To make a good succession plan, Sonya needs to start by making clear what your goals are. Think about the plan's goals and how it will help you reach those goals. Look at how you want the family and the business to grow and change in the future. Please think about whether or not you want your family to keep owning and running the business. A person's estate can be in balance if they name children who will run the business and give the rest of their assets to other family members. Also, as an entrepreneur who is leaving a business, it is important to plan your exit so that you can reach their retirement goals and meet your financial responsibilities (Lusardi 2019).

Strategies

The Succession Plan will frequently call for a change in the current owners of the company at some point in the future. Things such as shares in a firm and pieces in a trust are examples of things that can be transferred from one person to another. In other circumstances, the individual who owns the asset might remain the same, but the individual in charge of the company that owns the asset might be replaced (Bano, Omar and Ismail 2022).

For instance, a member of the family could become the appointee of a family trust by first purchasing shares in the corporation that serves as the manager of the trust, and then going on to become the appointee of the trust. Even if the asset technically remained belonged to the discretionary trust and hadn't been transferred to another party, the fact that they managed the trust on a day-to-day basis and had a financial interest in it would be demonstrated by this. Even though it was challenging, the vast majority of families were aware that the procedure had to be carried out. The first step, which is also the most difficult, is to begin discussing the problem with your family. But once the ice is broken, things start to fall into place, particularly if family members are devoted to the cause and there is a well-established ecosystem of consultants and experts. In other words, once the ice is broken, things start to fall into place. Therefore, once the ice is broken, things will begin to start falling into place. There is a chance that Sonya and Charles will experience something like this.

Questions

The questions which are to be asked are as follows:-

• What is your primary objective regarding your plan??
• What is your secondary objective?
• What are your options of retirement scheme?
• Are you willing to take long term risks?
• From when are you expecting positive results or negative results?
• What are your expectations from us for this planning?

References

Ahrens, T. and Ferry, L., 2020. Financial resilience of English local government in the aftermath of COVID-19. Journal of Public Budgeting, Accounting & Financial Management .

Atwood, C., 2020. Succession planning basics . American Society for Training and Development.

Bano, Y., Omar, S.S. and Ismail, F., 2022. Succession planning best practices for organizations: A systematic literature review approach. International Journal of Global Optimization and Its Application, 1(1), pp.39-48.

Brigham, E.F. and Houston, J.F., 2021. Fundamentals of financial management . Cengage Learning.

Lusardi, A., 2019. Financial literacy and the need for financial education: evidence and implications. Swiss Journal of Economics and Statistics , 155 (1), pp.1-8.

Oduwusi, O., 2018. Succession Planning as a Key to Effective Managerial Transition Process in Corporate Organization. American Journal of Management Science and Engineering , 3 (1), pp.1-6.

Ritchie, M., 2020. Succession planning for successful leadership: Why we need to talk about succession planning!. Management in Education, 34(1), pp.33-37.

Siambi, J. K. 2022. Leadership succession planning and organization transition: A review of literature. International Journal of Managerial Studies and Research, 10(3), 16-30.

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