Minimize Your Estate Taxes

The clock is ticking for you to potentially save millions of dollars in estate taxes.

Under current tax law, you only have until December 31, 2012 to utilize your lifetime gift tax exemption of $5 million. Married couples can gift up to $10 million tax free.

In the 30 years I've been working with auto dealers and their families on their succession planning, there has never been such an opportunity to minimize estate taxes.

So why isn't every dealer rushing to take advantage of this tax savings? “I didn't know.” “My estate isn't big enough.” “How can I do this and not mess up my kids?” “How can I do this and not adversely impact my lifestyle and ability to run my business?”

Those are responses I've heard this year. Let me address those and offer some suggestions.

As of 2011, the estate tax rate is 35%, the death-tax exemption is $5 million per person and the lifetime gift tax exemption is $5 million.

While this was a significant improvement from 2009 rates, the current law terminates December 31, 2012. Without Congressional action, the law reverts to 2001 rates of a 55% estate tax and a death and gift tax exemption of $1 million.

To take advantage of these current rates, you either have to die before the end of 2012 (not a good option) or gift up to $5 million (or $10 million, if married). If you gift assets now, they will always be outside your taxable estate and the growth on those assets will be outside your taxable estate.

Dealers wonder how they can give away that much without affecting their lifestyle. In some cases, they can't. However, a lot of dealers need to consider the following.

One dealer told me he wanted his son to succeed him and he saw this as a golden opportunity to transfer millions of dollars of stock value to his son, but he had to protect his lifestyle.

We decided to re-capitalize his stock in the dealership into voting and non-voting stock. Ninety percent is now non-voting. Dad can give away 90% of the equity and still have 100% of the control.

He can determine how big a bonus he wants to take and determine distributions from the company. He can take sufficient income by salary and bonus to allow him to maintain his lifestyle.

He also said his son would continue the family practice of leaving money in the dealership for working capital. The downside would be if he determined to someday sell to a third party, as dad's share of the sale price would have been significantly reduced.

However, this dealer said that he wants his son to succeed him and selling is not an option they are considering.

Another option for making gifts is to utilize a limited liability company to transfer stock and/or real estate to your children. Most dealers own the real estate for their dealership personally or in a LLC. That setup allows the dealer to have 100% control of the asset as the managing member, and the LLC can be structured to allow non-voting interests.

Just like the stock example, the LLC can have 100% of the control vested in 1% and 99% be non-voting.

This allows the dealer to maintain control while being able to gift away as much as 99% of the non-voting interest.

If it is your intention to not give your children any of the income (except enough to pay the income taxes), due to their age or fitness to receive the income, the LLC allows the dealer to withhold distributions and use the income to buy additional real estate or loan money to his or her company.

As a result, millions of dollars can be transferred outside the taxable estate while not adversely impacting your children. You decide when the time is right for them to get the income.

Certified financial planner Hugh Roberts is partner in The Rawls Group. He can be reached at 818-702-0889 ext. 155 or at [email protected].