Late-show host David Letterman will always be remembered for his top 10 lists. In that spirit, we present our own top 10 list of succession planning tips.

THE LIST

Just as "The Late Show" wouldn't be quite right without Paul Shaffer, planning wouldn't be quite right without succession issues. Succession planning is a vital component of every estate and financial plan for every professional client (including you) and business owner. While "The Top 10 Succession Planning Tips" may not be as popular as "The Top 10 Things That Almost Rhyme With Peas," hopefully it will generate more fees. (Get it? Fees rhymes with peas.)

#10...Define succession broadly. Advisors too often dismiss succession planning as planning for death. Insurance agents, even well meaning ones, may provide simplistic documents that only address a death buyout. Advisors must plan for succession comprehensively to provide the desired protections. Guide your clients to address all succession issues, such as death, disability (temporary and permanent), retirement, loss of a license, disagreement of equity owners, voluntary withdrawal, expulsion by other equity owners, termination with or without cause and dissolution, bankruptcy or closure of the business.

#9...Conflicts can hurt. Each equity owner should have his or her own attorney. While most people think this is a conspiracy by lawyers to run up the bill, it's far better that each owner has independent representation. That way, all issues can be hashed out at inception before problems arise. Lack of independent representation can prove to be the Achilles heel of a practice if a disgruntled owner successfully challenges the validity of the initial agreement due to the drafting attorney's conflicts of interest.

#8...Use auction buyouts cautiously. Owner disputes can be devastating. A simple approach can often solve the problem. It's known by many names-the auction method, Dutch auction, Russian roulette. Here's how it works: Any owner can say to the other, "The price of the business is $x per unit, share or per percentage interest. Either you buy me at this price or I'll buy you."

Caution your clients to revisit any such existing agreements since disparate financial positions caused by the recession may yield significant abuse. A wealthy equity owner could trigger this mechanism knowing that the other owners have been hammered financially and cannot make the payments. The solution? Amend the agreement to include reasonable payment terms to protect financially weaker owners.

#7...Plan for multiple events. Baskin-Robbins has 31 flavors. Why should a succession plan assume only one scenario? What if one partner retires, another quits and a third is fired? Will the remaining partner be able to afford the payouts? Run the numbers and evaluate the risks. Using caps (e.g., limiting the maximum payments for all buyouts as a percentage of revenue) can provide safeguards.

#6...Analyze disability. Disability is not simple to live with or to plan for. Most agreements are unreasonably simplistic. Make sure your disability agreement answers the following questions:

• How do you define "disability?"
• Do the definitions of disability in the governing legal documents coordinate with the definitions in disability income policies?
• Do you use the same valuation for disability as for death or other succession events?
• Should the business purchase disability buy-out insurance?
• Have you provided for senior/founder benefits?
• Should a founding partner have the same 60-day window for disability termination as a newbie partner?
• Are you using "bands" around disability periods? Termination may be automatic if a partner doesn't work for 60 consecutive days. What if the partner shows up on day 59, then is out another 59 days? "Banding" the 60-day period (i.e., using 90 days in any 200-day period) can prevent this abuse.
• Have you addressed temporary versus permanent disability?

#5...Discuss gifting. Giving equity to the next generation is a common succession planning step that can save a bundle of estate tax. Often gifts make use of the annual gift exclusion, which is $13,000 per person per year. Many closely held or family businesses restrict transfers in their governing documents to prevent interference from outsiders. These restrictions, if too severe, will prevent the gifts from qualifying for the annual gift exclusion. Specifically, the gifts will not be categorized as "present interests," meaning the beneficiary cannot enjoy the use or value of them immediately. Estate planners can tweak the legal documents to solve this problem, but too many clients fail to update documents frequently enough.