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Plan your estate now, save taxes later

September 17, 2013


There’s only a few months left to take advantage of key factors for estate planning in 2013. The estate tax provisions from last year’s American Taxpayer Relief Act of 2012 (ATRA), combined with dealership values that continue to be relatively low, provide significant tax-saving opportunities for dealers in 2013.

Exemptions and rates

The lifetime gift and estate tax exemption had been set to revert to $1 million in 2013. But ATRA made the higher limit, with annual inflation indexing, permanent. That means the exemption will continue to increase annually and there’s no expiration date looming — though Congress could still pass legislation in the future that would reduce the exemption. In 2013, the exemption is $5.25 million, up from $5.12 million in 2012.

One minor estate planning setback under ATRA is a five percentage point increase in the top gift and estate tax rate. The top rate is now 40%. But that’s much better than the 55% rate that had been scheduled to return in 2013.

Due to an inflation-indexing provision in place even before ATRA, the annual gift tax exclusion also has increased, from $13,000 per recipient in 2012 to $14,000 in 2013. The exclusion allows you to make tax-free gifts to an unlimited number of recipients without using up any of your lifetime exemption.

A pressing priority

Every day you delay estate planning, your assets may appreciate in value. So start estate planning early to maximize tax-free transfers of dealership assets before they appreciate.

The $14,000 annual exclusion ($28,000 for married couples splitting gifts) may not seem like much, but it adds up over time if you make successive gifts to multiple recipients. Gifts must be made by Dec. 31 — or you lose the exclusion opportunity for that year.

The lifetime exemption can be taken today, tomorrow or at death, and it needn’t be used all at once. But if you use it to make gifts of ownership interests now and your dealership grows, the future appreciation on those interests will pass to your heirs gift- and estate-tax-free.

Your dealership’s worth today

An appraiser can help determine how much your dealership is worth today. Typically, value is a function of the franchise and the owner’s cash flow, but contemporary sales prices paid for competing dealerships might be relevant, too. Often dealer-owned real estate — showrooms, parking lots and service facilities — is valued separately from the operating business.

If you’re gifting minority or nonvoting interests, your transfers could be eligible for valuation discounts that further reduce value for tax purposes. Appraisers know how to quantify these discounts using empirical data that will withstand IRS scrutiny.

Estate planning vehicles

There’s no one-size-fits-all estate planning tool that works for everyone. Among the most popular options for dealerships are:

Family limited partnerships (FLPs). Here, the donor contributes assets to the partnership (say, dealership stock and real estate) in exchange for general partner interests. This allows the dealer to retain control.

Family members are given (or buy) limited partnership interests at discounted values. Combined valuation discounts could be as high as 50%. But the IRS scrutinizes FLPs, so it’s critical to set them up and administer them properly.

Grantor retained annuity trusts (GRATs). These allow donors to transfer dealership assets to an irrevocable trust in exchange for annual payments over the trust’s life. When the trust expires, the beneficiaries own the dealership and any other trust assets.

The value of the GRAT equals the discounted present value of the annuity payments, which is typically less than the current fair market value of the trust’s assets. Legislation has been discussed that would reduce the tax benefits of GRATs, however, so it may be beneficial to set one up sooner rather than later.

Other considerations

Before making any changes to the ownership of your dealership, review franchise agreements and obtain your manufacturer’s written approval. If you violate your franchise agreement, you might be forced to sell, leaving your heirs without a business to inherit.
For more information on this topic, please contact Frank Panzeca at [email protected].

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.


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