Timing Might Be Right for Dealers to Transfer Ownership
It is 2010 and from an estate planning perspective, the perfect storm has arrived. Dealership franchise values and commercial real estate values have dropped significantly, interest rates are at historic lows, and tax rates will be rising in the future based on government deficits and the latest budget proposals.
“While there is no estate tax in 2010 (unless Congress retroactively enacts legislation), the estate tax will come roaring back in 2011 at pre-Bush tax cut rates,” says Carrine Reilly, a tax principal with LarsonAllen. “Now may be the time to transfer some of your dealership wealth to the next generation while values and interest rates are low, some tax-favored estate planning techniques are still available, and gift tax rates are reduced.”
Estate tax overview and changes
The estate tax, often called the “death tax” is a tax imposed on the value of a person’s assets transferred when they die. Certain exemptions are available to reduce the estate tax; the most popular is the unlimited marital deduction. This deduction allows spouses to transfer “unlimited” amounts to each other during lifetime or at death. You can always transfer to a spouse.
For transfers to non-spouses, a lifetime exemption is available to reduce the tax. In 2010 there is no estate tax because the lifetime exemption is equal to the assets transferred; however this lifetime exemption is reduced to $1,000,000 in 2011 and thereafter while the top estate tax rate increases to 55 percent. As noted in the table below, this means in 2011, assets given in excess of $1,000,000 could be subject to federal tax at 55 percent of their value!
Estate tax
|
Year
|
Highest possible rate
|
Exemption for non-spousal transfers
|
2010
|
0%
|
100%
|
2011
|
55%
|
$1,000,000
|
Gift tax overview and changes
There are also changes to the gift tax, which is imposed when assets are transferred as a result of a gift. Like the estate tax, there are certain exemptions and exclusions to reduce the gift tax, including the unlimited marital deduction, the annual exclusion.
The “annual exclusion” allows you to annually transfer $13,000 in cash or property to as many individuals as you choose without incurring any gift tax. This exclusion expires if not used in a calendar year, thus it is sometimes called the “use it or lose it” exclusion.
In addition to the annual exclusion, each person is allowed a $1,000,000 lifetime exemption to the gift tax. This exemption is currently in effect and is scheduled to remain at the same level in 2011 and future years based on current tax law.
What is significant about the gift tax in 2010 is that the rate is reduced to 35 percent and will increase to 55 percent in 2011 if no other legislation is enacted.
Gift tax
|
Year
|
Highest possible rate
|
Exemption for non-spousal transfers
|
2010
|
35%
|
$1,000,000
|
2011
|
55%
|
$1,000,000
|
“We don’t know what future legislation may bring and how that may impact the scenario, but with taxes, valuation, and interest rates so low, this is the best estate transfer opportunity I’ve ever seen,” adds Reilly.
Ownership transfer options
In order to avoid higher estate and gift taxes in 2011, now may be the perfect time to transfer some of your dealership assets. While an outright gift may be very simple, there are a few key strategies you can employ to maximize the asset value you transfer to the next generation.
Family limited partnership
A common estate planning strategy for transferring dealership real estate is the family limited partnership (FLP). These are popular because of the advantages they afford in the way of creditor protection, discounts on transfer, and the flexibility to keep the assets in the family while allowing the owner of the assets (typically the general partner) to remain in control.
If the dealership real estate is transferred to a FLP, the general partner can operate the partnership, execute leases with the dealership on behalf of the partnership, and determine when cash distributions will be made. Because these powers reside with the general partner and not the limited partners, a discount in valuing the gift of the limited partnership to the next generation may be allowed.
Dealership corporation option
Depending upon your ownership structure, a dealership corporation might make sense. “It’s the same concept as family limited partnership,” notes Reilly. “Both use lack of marketable and minority discount to depress the value. One is in a partnership context, the other a corporation.”
Transferring ownership to generate cash flow
If a dealer only wants to transfer future appreciation to the next generation and create cash flow from the transfer, a sale of dealership real estate or a portion of the business on the installment basis at a discount may be very attractive while both property values and interest rates are low. Additional tax savings may be obtained if defective grantor trusts are used to purchase the property.
A final consideration
A final succession planning issue for dealers to consider relates to owning 100 percent of the dealership and being exposed to the risks related to the factory's franchise ownership requirements and approval process if something were to happen to you. Most dealers have spent their life building the dealership and the thought of putting the transfer into the hands of a factory executive is not a risk most dealers would be willing to take. This is one of the primary motivating factors for dealers to start the process of creating an estate and succession plan.
How we can help
There are many other planning strategies beyond the FLP and corporation option that can help reduce values and maximize the exemptions available. In the current economic environment, many people have focused their energies on surviving this downturn. Thankfully, this economy won't last forever—but don't miss what may be a once in a lifetime opportunity to transfer wealth to your heirs with a minimum of estate tax.
For more information on dealership estate and succession tax planning contact Dave Wiggins at dwiggins@larsonallen.com or 314-336-3816 or Carrine Reilly at creilly@larsonallen.com or 972-644-3167 or a dealership principal in your region.