Pub. 3 Issue 4

10 www.glancda.org to be the dealer principal and (ii) the employee has ample time to pay you the fair consideration for the dealership (which may not be possible for the employee should unplanned circumstances dictate a lump sum payment after death). ESTATE TAXES Another reason to act now to develop a plan is to ensure that all future appreciation in the business takes place outside of your taxable estate. The current estate tax exemption is $5,450,000 per person (a married couple can take advantage of a collective $10,900,000). If the value of all of your assets owned at the time of your death is less than $5,450,000, your estate pays no estate taxes. However, for every dollar over $5,450,000, your estate will pay tax at the rate of 40%. For example, assume that John and Jane both die in 2016 owning the assets listed below. Their estates will pay an estate tax calculated as follows: Assume instead that John and Jane live another 15 years and, during that timeframe, John and Jane’s assets grow to double their current value. If the estate tax exemption in the year of John and Jane’s deaths is the same as the current estate tax exemption, John and Jane’s estates will pay an estate tax calculated as follows: By transferring interests in the dealership now, all of the future appreciation in John and Jane’s car dealership will belong to their children and would be taxed outside of their estate – resulting in significant estate tax savings. COMMON CONCERNS Our clients share with us many concerns regarding the proposed transfer of their dealerships. Here are some common concerns raised by dealers desiring to transfer their dealerships to their children: Q: I want to transfer my business to my children but I want to stay in control. A: Both objectives can be accomplished by transferring non-voting interests in the entity. The best example of this division in control is a limited partnership, which is typically formed to have a single general partner who owns a small percentage interest in the partnership (1%). The general partner operates the business and makes all business decisions. The limited partnership also has one or more limited partners who own the majority of the ownership interests in the partnership (99%) but who have no say in business decisions. By implementing this structure, a dealer could transfer the limited partnership interests to the children – thereby transferring a majority of the equity in the dealership – and still retain control through the general partnership interest. It is possible to use the same division between voting and non-voting interests in a limited liability company, an S corporation and a C corporation. Q: I want to transfer my business to my children but I need the cash flow from the business to maintain my standard of living. A: Once the interests in the dealership are transferred to the children, each child will thereafter receive his or her proportionate share of the cash f low from the dealership. Instead of gifting interests, the dealer could sell interests in the dealership to the children in exchange for promissory notes or in exchange for private annuities, thereby ensuring a steady stream of cash f low from the dealership. While the sale of the interests in the business provides significant estate tax benefits, the sale will also likely have adverse income tax consequences. Therefore, there are other, more advanced, methods of estate planning to consider that may allow sales of interests in the business that do not trigger income taxes. Dealership $9,000,000 Residence $1,500,000 Stock Portfolio $1,000,000 Other Assets $2,000,000 Total $13,500,000 Less Estate Tax Exemption ($10,900,000) Taxable Estate $2,600,000 Estate Tax at 40% Tax Rate $1,040,000 Dealership $18,000,000 Residence $3,500,000 Stock Portfolio $2,000,000 Other Assets $4,000,000 Total $27,500,000 Less Estate Tax Exemption ($10,900,000) Taxable Estate $16,100,000 Estate Tax at 40% Tax Rate $6,440,000