8-20-07

Automobile dealers spend their lifetimes building dealerships into profitable and valuable enterprises. Dealers know full well that the demands of the day-to-day operations are more than a full time job. Just like other hard driving managers and entrepreneurs, most dealers never find enough time for long-term planning. As a result, the following two issues are often overlooked:

Who will succeed the dealer as the operator of the dealership?

What steps can be taken to minimize estate taxes that will be levied on the dealership?

Addressing these issues should be a priority for all dealers.

Who died and left them boss? You did…

Under the terms of the typical franchise agreement between the dealer’s company and the manufacturer, the agreement terminates upon the death of the dealer. At that time, the dealer’s estate can propose a successor operator to the manufacturer; however, there is no assurance that the manufacturer will approve the proposed successor. If not approved, the dealer’s estate may be forced to sell the dealership within a fixed but short period of time at what could be a fire sale price. Though Illinois and some other states have enacted legislation for succession if certain criteria are met, most manufacturers also provide a mechanism to avoid this scenario from playing out.

Most manufacturers will allow a dealer to designate a successor operator who during his lifetime meets their qualifications and who will take over management of the dealership upon the death of the dealer. With manufacturer approval, upon the death of the dealer, the successor will receive a new sales and service agreement, typically for two or three years.

It is in the best interest of the dealer and his family to work with the manufacturer to have a successor approved in advance, so that business can continue to operate smoothly after the death of the dealer. The long-term value of the dealership and the estate may hang in the balance.

You can’t take it with you — but you sure can leave a lot more behind

While addressing successor operator issues, it is also important to focus on estate taxes that will be levied upon death.

In general, unless the dealer has a surviving spouse and has taken the necessary steps to ensure a marital deduction for estate tax purposes, an estate tax of approximately 50% will be levied upon the dealer’s assets (after the application of the exemption, currently $2 million). Even with a successor approved by the manufacturer, the dealer’s estate may nevertheless be forced to sell the dealership in order to pay estate taxes. 

Fortunately, the tax code allows for various strategies which, when properly implemented, can minimize, or even eliminate, the estate tax bite. Manufacturers, an important part of this mix, generally will cooperate with dealers in implementing these strategies.

For example, many dealers separate the ownership of dealership real estate from the operating business and, during their lifetimes, transfer the real estate to trusts for the benefit of their families via gift or sale. Rent is then paid by the dealership operating company to the trusts, thereby moving not only the real estate, but also the rental income, to trusts that are not included in the dealer’s estate for estate tax purposes. Likewise, it is also possible to sell or make lifetime gifts of portions of the stock or interests in the dealership operating company to such trusts, thereby further shifting important assets away from the dealer’s taxable estate. 

When structuring any such shift in assets from a dealer’s taxable estate, the plan must fit within the limitations imposed by the gift tax laws. The gift tax, in general, limits the value that may be shifted from a taxpayer’s taxable estate during lifetime without incurring transfer tax, to $2 million for a married taxpayer (assuming use of the spouse’s lifetime exclusion). Nevertheless, with proper planning, this amount can be leveraged to allow an even greater shift of value.

The sooner steps are taken, the greater the tax savings that can be realized as the post-transfer appreciation in the value of the assets transferred will accrue in trusts that are not subject to estate tax.

A good investment of your time

By investing a little time now and crafting solutions to the two issues noted above, dealers can help ensure the continuous operation of the businesses they have spent their lifetimes building, and maximize the assets that they will leave to their families.

The attorneys of Burke, Warren, MacKay & Serritella represent more than 100 automobile dealers throughout Illinois, and in many other states. This representation includes succession and estate planning, as well as assisting franchise owners and managers with all aspects of their operations, including dealership purchase and sale, financing acquisitions, corporate restructuring, and all phases of commercial litigation. For additional information, we invite you to contact Marty Ryan 312/840-7060 / mryan@burkelaw.com, Bill Kelly 312/840-7061 / wkelly@burkelaw.com, or Ira Levin 312/840-7065 / ilevin@burkelaw.com.