By Hugh Roberts, Partner, The Rawls Group
‘’I’M NOT READY TO GIVE MY KIDS $23M!”
“When my father died, we could have been in real trouble trying to pay his estate taxes. We just got lucky with favorable valuations and market conditions, but I’m not going to put my children in that position.” This prominent auto dealer understood that getting lucky is not good planning.
With the lifetime exemption per person currently in 2020 at $11.8M, a married couple can pass a $23.6M estate tax-free to their heirs. For most Americans, estate taxes are therefore no longer a problem, but that is not true of car dealers, with the value of dealerships having escalated considerably. Unless you have a plan in place which will allow your estate to be able to pay your estate taxes, your dealership succession plan could be in danger! Dealers need to be concerned, since the estate tax exemption is scheduled to revert to 2017 levels – $5.4M per person, unless Congress acts to extend the law before the end of 2025. This reduction in the exemption would result in most dealers being subject to paying estate taxes.
I’ve never met a dealer who trusted Congress to solve his problems! So, what can you do now to minimize your estate taxes? Today is truly a ‘Use it or lose it’ time. Those who utilize their lifetime exemption to transfer assets to their loved ones will get the benefit of the highest exemption ever – $11.8M x 2 (husband and wife) = $23.6M. Those who wait, risk cutting their exemption by more than half and having to pay millions more in estate taxes! That’s a succession planning nightmare!
“I get it Hugh, but I’m not ready to give my kids $23M dollars!” exclaimed one of my dealer clients. He did not want to pay more taxes than he had to, but he did not want to risk his financial future by transferring too much to his kids. Another dealer expressed that he was afraid of the impact this would have on his children, taking away their incentive to work and fostering a sentiment of entitlement. My partners and I at The Rawls Group understand and agree with both of those concerns. But with a properly structured plan, there is a way to have your cake and eat it too!
A Structured Plan to Help You Remain in Control of Your Assets
The following planning technique can help you to utilize your lifetime exemption without having to transfer assets before you are willing to do so.
Spousal Lifetime Access Trust – SLAT is a planning vehicle that allows you to minimize your estate taxes while maintaining access to your assets during your lifetime, for those dealers who are married.
A SLAT is set up for each spouse and while the trusts are essentially the same, a few provisions are included to make the trusts sufficiently different to qualify.
A SLAT is an irrevocable trust. Assuming you had not used any of your lifetime exemption, each spouse could transfer up to $11.8M of assets into a SLAT for the benefit of the other spouse. As a result, $23.6M would be transferred out of your taxable estates, plus all the appreciation on those assets over the balance of your lifetimes. You are the primary beneficiaries of these assets, with your children as the secondary beneficiaries. If you have made your gift transfer before the law changes you will be grandfathered under current law.
“So, what is the downside?” asked my client.
Therefore, the first question is determining whether the surviving spouse will have sufficient assets available either in their SLAT or owned otherwise to maintain his/her lifestyle.
“What about control?” Control of the assets should not be a problem as it can be addressed many ways to keep voting control in the dealer’s hands or that of the spouse, if desired. Determining when you want your children to have access to the SLAT assets is a part of the design of the trust.
As with all estate planning, you must work with qualified tax advisors who can tailor the plan to meet your planning situation.
If you plan to transfer dealership stock to a SLAT, you must first secure written approval from your manufacturer or risk violating your sales and service agreement.
“Let me see if I’ve got this straight,” said my client. “My spouse and I have access to the trust assets during our lifetimes, we can structure this plan so we remain in control of the assets, our children will receive the assets, but not before we want them to, plus we save millions in estate taxes! Our family and business succession plan are the winners and the IRS is the loser – I like it!”
ARTICLE BY Hugh Roberts
Hugh Roberts, CFP® is a Partner of The Rawls Group-Business Succession Planners. Hugh specializes in dealing with the issues that must be resolved by auto dealers and their families in order to preserve assets and develop succession plans for their dealerships.
