Editor's Note: Here’s an excerpt from Succession Planning: Step-by-Step. Go here to read more. 

A sound dealership succession plan addresses a long list of issues, including retirement income, transferring wealth to the dealer’s heirs, transferring ownership, dealing with the income and estate tax consequences associated with an ownership transfer, and addressing other issues key to the ongoing success of the business; not the least of which (and often forgotten) is transitioning management.

Here are steps to develop a succession plan for your dealership.

Step 1: Identify and prioritize goals for the transition.

Step 2: Identify and prepare new management. 

Step 3: Determine retirement cash needs

Step 4: Review options for funding the transfer

Step 5: Planning for Ownership Succession

Step 6: Identifying Options for Transferring Ownership

Step 7: Integrate Succession & Estate Planning

Throughout this series, we have emphasized the distinction between ownership and oversight. As an owner considers succession, the distinction becomes critical, particularly when an owner wants to keep the business in the family, but does not have a family member willing or able to run it. 

We’ve seen a lot of this in recent years, like this example: The dealership founder had not finished high school, but instead had gone to work in a dealership. Over the years, he became knowledgeable enough to start his own business and was granted a manufacturer’s line. His business was a success, and when he retired, his son, who did obtain a high school diploma, succeeded him. He, too, was successful, growing the business and sending two sons through college, then to law and medical schools, respectively.

Now working as a lawyer and a doctor, neither son can participate in, much less manage, the dealership. In this case, the sons could retain ownership as long as management is done by someone competent and knowledgeable in dealership operations.

There is clearly an overlap between a dealer’s estate plan and succession plan, so they should be done in tandem and recognize the unique aspects of the dealership business as well as the succession goals of the retiring dealer.

Even where a next generation will take over operation of the dealership, a comprehensive succession plan must include estate planning to ensure transfer of the dealer’s wealth in the most tax-efficient manner possible, minimizing estate and gift taxes. It also includes planning to ensure the dealer’s estate has sufficient liquidity to pay taxes and other expenses without forcing the sale of assets, including the dealership.

Estate planning as part of a succession plan involves many traditional estate planning techniques. However, many of these techniques are not available to dealers. As opposed to other business owners, generally, the dealer must obtain manufacturer approval for ownership transfers. This includes estate planning transfers.

Some of the most frequently implemented techniques used by dealers include:

• Annual gifting programs when the dealer begins succession planning early enough to transfer a substantial portion of the estate with no transfer tax.
• Family limited partnerships to transfer ownership to a next generation at a discounted value. The dealer retains control of the business so the value of transferred interest is discounted to reflect the economic reality that the next generation cannot control or market the business. 
• A grantor retained annuity trust (GRAT) allows the dealer to make large transfers of assets including ownership in the dealership to family members without paying gift taxes. In a GRAT, ownership is transferred to an irrevocable trust in exchange for annual fixed annuity payments based on the value of the business at the time of transfer. Payments are made over a specified time and any remaining value not paid out goes to the trust beneficiary along with ownership of the business.
• An intentionally defective irrevocable trust (IDIC) leverages elements of the tax code to take advantage of differences in how income and estate taxes are treated relative to the trust. This works well for assets that are appreciating, like a growing dealership. In an IDIC, the dealer, or grantor, transfers ownership to the trust in exchange for income, which is taxed as income. However, the assets in the trust are not included in the estate for estate tax purposes.
• Self-cancelling installment note is a technique whereby the dealer sells ownership to a family member or trust in exchange for a promissory note. The note includes a self-cancellation feature. The dealer receives payments while alive and the note is canceled upon his or her death. As a part of your exit strategy, these techniques can accomplish various goals, more than simply reducing transfer taxes. Estate planning helps ensure a successful transition of your dealership. However, an estate plan is not a succession plan.
  
  An estate plan without succession planning is a recipe for disaster as it only addresses some of the financial concerns relative to succession planning. It doesn’t address issues such as retirement, disability or other potential life and business-altering occurrences. It also doesn’t address non-financial concerns, specifically leadership and management succession, which must be approved by the manufacturer whose products the dealership represents.

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