What is Continuity Planning?

Will & Estates Family Lawyer

In the wake of the COVID-19 pandemic, many more people are talking about risk management. How did our society fail to manage the risk of a virus? How did individuals fail to adapt to the scientific realities of the situation?

Risk management is handled in different ways by businesses, governments, and individuals. How can you and your family prepare yourselves best for any potential outcomes?

Estate Planning and Risk Management

When it comes to estate planning, risk management can be addressed by looking at continuity planning. The world of continuity planning is based around long-term risk management, and on the preparation of “contingency plans.”

Estate planning is historically based on protecting your assets. Your estate planning attorney helps you avoid taxation by creating structures. These structures could involve trusts, they likely include a Will, and they may involve moving your assets to limit or reduce your exposure to taxes.

How Does Continuity Planning Go Beyond Estate Planning?

With continuity planning, you take this notion of asset protection, and push it further. Certainly, there is risk avoidance, which is entirely about protecting your investments and other assets. With traditional estate planning, there is also:

Risk Reduction. Through discounting techniques, through “gifting” money to beneficiaries through trusts and cash gifts, and through other means, you can help reduce your risks.

Transferring Risk. Life insurance is one example of transferring risk. You move the risk associated with accidents, illness, or death onto a third party – in this case, onto the life insurance company. The insurer takes responsibility for this risk, and protects you against any negative financial impacts associated with those risks.

Estate planning generally focuses on short-term trends. This is helpful in a variety of ways. These short-term objectives are based on knowable certainties – the current state and federal tax laws, for example.

Continuity planning, takes the tax avoidance of estate planning and adds to it more long-term objectives. These long-term objectives delve into areas which are less certain. Nobody truly knows what the stock market will look like in more than ten years. Even relatively conservative investments like bonds are difficult to predict with any sense of certainty on a longer timeline.

Scenario Planning

legal document

The notion of longer-term planning dates back to “scenario planning,” a forecasting tool first implemented during World War II. Scenario planning was the first time that economic planners looked at spans of more than 50 years when constructing financial plans. In bridging the gap between generations, scenario planning was able to expose both risks and opportunities on a longer timeline.

Many of these ideas can be best understood when looking at a family-controlled business. Investment experts have studied successful multi-generational family businesses, and have found some things these companies have in common.

There are three leading indicators that can predict the success of such a business:

  1. How does the business continue, from an administrative standpoint? What structures are in place to keep the business relevant, modern, and efficient? How does the company govern itself? There needs to be ongoing updating of the written agreements dealing with the family members’ control of the company. Unwritten agreement must be updated over time as well. The portfolio strategy for the strategy should focus on goals that are not based on transactions. That means liquidity events rather than the selling of shares.
  2. These are physical resources, financial assets, human resources (both within the family and outside of it), and technological resources.
  3. Innovation and Learning. This is related to both the technological and human resources. If the family can be inventive, it can thrive. If they hire senior management based on merit rather than nepotism, they can thrive.

The same notions can be applied to a family’s wealth over generations. Continuity planning takes these considerations into account, and applies them to long-term financial planning.