Camp Family Automotive Group, of Spokane Wash., faced serious problems once owner Jerry Camp passed away in 1995. The family was forced into a power struggle soon after the owner’s death. Phil Camp, Jerry’s son, saw the relationship between his siblings reduced to barely speaking once decisions were made over the estate. A cover article in the Wall Street Journal summarized the repercussions that can arise without careful planning with this quote, “…before long his [Phil Camp's] brothers had all but stopped speaking to him. ‘There is a lot of friction, anger and bitterness,' says Mr. Camp's sister, Julie Camp McKay."
Eventually the business was sold to Lithia Motors Inc., a publicly traded automotive group. It is doubtful that Mr. Camp’s original objective was to sell the dealership.
Dealers who plan extensively and carefully can avoid pitfalls like power struggles, unrealized expectations of income and emotional baggage that the Camp family experienced.
Bert Boeckmann, president of Galpin Motors of California, has established an estate plan that will help carry his dealership into the next generation. He wants to ensure that all of his children are taken care of. He realizes for that to happen, the business must continue - even without him at the helm. Since only two of his five sons are active in the dealership, the split of his estate might not be completely proportional due to his sincere desire to see Galpin Motors continue healthily into the next generation.
“You shouldn’t negotiate. You are the parent, but you always want to find out what your children’s desires are. Sometimes the most loving child will be afraid to state what they want for fear of hurting a parent or giving the appearance of being too worried about what they are going to get when a parent dies,” said Boeckmann.
That means that if the dealership owns valuable assets, but the dealership is dependant on them, those assets would most likely be turned over to the children who plan to retain and operate the dealership.
Because he has over 1,200 employees, it was important to him to find a qualified individual that he and his trusted attorney both agreed upon. “I have an attorney who works with me, and we both researched professionals who help facilitate estate planning. We spoke with individuals that were highly recommended by other industry leaders and then chose the person who I felt was the most qualified in large asset and estate planning. Amazingly enough, both my attorney and I came up with the same person.”
Norm Raymer, MBA, ChFC and CEP, is the president of The Dealer Guys, a wealth management firm that specializes in estate planning. Raymer believes the results of a succession plan depend largely on how effective and thorough the planning has been. “Often, part of the business ends up in the hands of inactive heirs who can add little to the business but who want income equal to working stockholders,” Raymer said, “Typically, the working heirs will want to retain control. Retaining control and preventing outsiders from interfering in the management of the business and its affairs will be crucial objectives.”
It’s normal to hope your family will handle your estate according to your wishes if you die or become incapacitated, however the only true way to guarantee your wishes are carried out is through estate planning. This involves various methods including gifting before death, implementing wills, developing living trusts, issuing powers of attorney and researching living wills.
Jorg Kaltwasser, a tax member with over 28 years experience with national CPA firm Dixon-Hughes, stated that one way to benefit from significant estate tax savings is by utilizing annual gift exclusions. Individuals with sufficient assets can use the federal gift exclusion to gift up to $12,000 ($24,000 with a spouse) to each of an unlimited number of family members or other recipients. “This ‘freebie’ from the transfer tax system can save considerable estate tax if used year after year. Estate tax rates are still as high as 46 percent. A $24,000 gift can be viewed as reducing estate tax by $11,040,” Kaltwasser said. He also reminds dealers that direct payments of tuition or medical expenses are additional exclusions not part of the annual exclusion.
Will provisions don’t necessarily end succession conflicts. Disgruntled heirs and dissatisfied spouses still have the ability to contest a will. This can delay the transfer of the business and cause a loss of employees and a potentially devastating loss of creditor confidence.
Wills are, however, a big part of a well balanced estate plan. In plain English, a will is a written document, usually prepared with the help of an attorney that directs the disposition of the deceased person’s property. In order for a will to be a legal document it must be typewritten or computer generated, expressly state that it’s your will, have the date and your signature, and be signed by at least two (in some states three) witnesses who must watch you sign the will. Also, legal witnesses must not be entitled to anything in the will.
A power of attorney is generally set up in three ways: as a durable power of attorney that remains in effect during incompetence or other disability, a standby power of attorney that goes into effect when there is enough incapacity to manage affairs and a temporary power of attorney that generally only is used if an emergency arises.
A living will is a document that controls what decisions are to be made if the unthinkable happens. This type of document becomes useful if you become incapable of expressing your wishes about your health to care providers. Living wills are commonly called a medical directive or declaration. These legal documents can ease the burden of family members in some of the most trying times, determining whether life support should be administered or not. It will not, however, impact what happens after your death.
Trusts, some of the most important documents you set up in your life, are generally complicated. An experienced attorney is recommended to draw up this complex document. There are trusts for nearly every estate out there including; irrevocable, charitable, living, implied trusts, spendthrift trusts and tax by-pass trust. This is just the beginning.
A common type of trust is an Inter Vivos trust or revocable “living” trust. The grantor is allowed to transfer title of property to a trust. This allows them to serve as a trustee as well as remove property from the trust during their lifetime. If circumstances change like the death or birth of an heir, a divorce or marriage, then this type of trust can be altered.
An implied trust is enacted if the court determines that there was intent by the property owner for their estate to be used for a particular purpose even though there wasn’t a formal declaration of a trust. In this case, the courts determine how the estate would be divided.
Many dealer principals focus on the tax by-pass trust. This trust allows one spouse to leave money to the other, while limiting the amount of federal estate tax that would be payable on the death of the second spouse.
A spendthrift trust is established for a beneficiary that does not allow the beneficiary to sell or pledge away his or her interests in the trust. This type of trust is beyond the reach of the beneficiaries’ creditors until such time that the trust is distributed
All of the aforementioned trusts, each with a specific purpose, have liabilities and should to be discussed in depth with an attorney or estate planner to determine which one is the most beneficial for your needs.
Instead of a trust, some dealers prefer a buy-sell agreement approach to their estate planning. A buy-sell agreement is drawn up before an owner retires, becomes disabled or dies. A buy-sell can be arranged in several ways that help eliminate some of the pitfalls associated with succession, including having heirs demand a sale of the business at distressed prices. There are two types of general buy-sell agreements – The cross purpose and stock redemption agreement. In a cross-purchase agreement, each owner of the corporation purchases an insurance policy on the other shareholders. The purchaser is both owner and beneficiary of the policies. Upon the death of a shareholder, the other shareholders are then able to use the life insurance proceeds to purchase the deceased owner’s shares. In a stock redemption agreement, the corporation owns policies on the lives of the shareholders. When a shareholder dies, the corporation buys the deceased shareholder’s interest in the company with the insurance proceeds. Typically, the buy-sell agreement provides that the surviving owner of the business will purchase the deceased or withdrawing owner's share of the operation. Often a buy-sell agreement includes “first to die” insurance that will provide the funding for the purchase by the surviving owner.
So, where do you begin when starting your succession plan? Raymer suggests the following steps to managing the estate planning.
Have a competent financial/estate planner, CPA and attorney. Thoroughly research what financial or estate attorney you will use, and utilize your twenty groups or business organizations to find suggestions for attorneys, CPA’s and estate planners.
- Decide how you and your spouse will be taken care of while alive and how your assets will be divided after death.
- Decide who will manage your assets and money.
- Complete the necessary legal work to assure your plan is legally enforceable.
- Review your plan every two to three years and update as necessary.
The payoff for taking the time to create an estate plan is enormous, especially for those you leave behind. “You see that what you have worked hard for your entire life is given to the people you care most about. You create financial security for your family and you give to your family and causes that you care about, rather than the government,” Raymer said.
Vol 3, Issue 12