1. Suboptimal business structure
Structure the business and its assets efficiently—this is of key importance in maximizing wealth transfer, as well as stabilizing the business through any transition. Though your immediate focus may be on day-to-day operations, your business grows increasingly complex as you add dealerships, real estate corporations, reinsurance corporations and, perhaps, a management or holding company.
Save time and expense in accomplishing your estate goals by getting guidance from a trust and estate planning attorney early in the lifecycle of your business. A well-designed business structure not only provides significant tax benefits, but it also lays a solid foundation for effective, ongoing management and governance of all the entities that make up your business. If the business is intended to pass generationally, you can also minimize or even eliminate any estate tax burden that may be placed on the business, and therefore, better secure the continued success in the next generation.
2. Untimely tax planning
It’s impossible to overemphasize the importance of conducting early estate planning long before you exit the business—it’s the most important tactic for achieving tax-efficient wealth transfer. If the business’s valuation is significant, then planning for adequate liquidity when the estate passes is a primary concern.
Starting a transition without a plan in place means fewer opportunities to minimize your tax exposure, including:
- Leveraging the estate tax exemption
- Putting valuation discounts in place
- Considering trust structures to meet your estate planning goals
- Passing wealth, through gifting, to lower the taxable estate value
It’s important to proactively work with your Truist Dealer Relationship Manager and Wealth Advisor on plans related to trusts. In addition, experienced estate attorneys and financial advisors can help you capitalize on every occasion to reduce the tax burden as you transfer ownership.
3. Last-minute gifting
Another tax-saving strategy is to gift while you’re still operating the business. Waiting until the last minute may reduce the likelihood of achieving the best transfer outcomes for you and your family.
To create a plan that fits your age, where you are in the business lifecycle, and the level of involvement you want going forward, ask:
- What are your motivations and goals around transition?
- What income do you need to maintain your desired lifestyle?
- What other assets and income streams do you have
A qualified estate planning attorney, accountant, financial advisor, and banking relationship manager can work as a team to design a gifting strategy that achieves the tax benefits and succession outcomes you want and to set up the level of continued income and involvement that you desire.
As maintaining control is a primary consideration for most of our owners, consider the transfer of non-voting interests and retaining voting interest. This can provide you flexibility if business or economic shifts occur. Moreover, explore different trust structures. For instance, an irrevocable life insurance trust can be designed to achieve tax-free wealth transfer and provide liquidity for payment of estate tax to the extent any portion of the retained business interest is included in your estate.
4. Contentious family dynamics
Transition planning forces leaders to make tough choices that may lead to dissent among family members. It may be tempting to let it unfold once you’ve stepped aside, but it’s best to address these issues upfront for the sake of your family and your business.
Strong emotions, old resentments, and challenging personal relationships can complicate planning and transition. These situations often present themselves in blended families, when there are longstanding rifts within a family, and when some children are engaged in the business while others are not.
Bypass sentiment and think objectively about who is best qualified to assume leadership of the family enterprise. It may be best to determine now whether business ownership can be shared with all family members or if ownership needs to be held within a smaller subset of the family to provide the best chance of continued success. If an owner’s primary goal is continued family harmony, then a decision may need to be made to transition the business prior to the owner’s passing if issues resulting from complicated family dynamics cannot be resolved. With solid reasoning behind your choices, you’ll be better prepared for those potentially uncomfortable conversations.
5. Psychological resistance
Dealers sometimes hesitate to start transition planning, slowed by conscious or unconscious concerns regarding:
- Uncertainty about what legacy they wish to leave
- Discussions of their own passing
- Loss of identity (“the business is who I am”)
- Loss of the leadership role in the family
- Loss of the primary income stream
- Loss of control
Consider your long-time employees, your management team, your business partners, and your family. Crafting strategies that are fair to each person is a daunting task. Tackling such an undertaking means contemplating handing over a business you’ve worked hard to nurture and grow, which can keep you stuck on the starting block.
These doubts and anxieties can become paralyzing, but it’s important not to let them delay, or prevent, progress on your transition planning. If it starts to feel overwhelming, remind yourself that you don’t have to get it perfect right now. Start the process where you are today. You can improve your plan over time, adapting it as your vision and goals for your post-transition life evolve.
6. Delays in seeking OEM approval
Getting OEM approval needs to be part of your exit planning process. As dealer groups become more complex, the OEMs typically want to see more documentation and have a say in the plans of the business. While it’s not likely to pose a problem, OEMs are more curious about the details of dealers’ succession plans than they once were.
Here again, timing is paramount. Start the process early to make sure the OEM is on board with your plans. They may request that you structure the succession plan with a ramp-up period to get comfortable with the successor you’ve chosen.
7. The worst-case scenario: No transition plan
To prevent chaos in the event of an untimely death, even young owners need a succession plan. Not having one could create daunting tax liability for your family and threaten the continuity of the business.
A well-constructed plan will address existing contractual and shareholder agreements to build a path for successors without any financial fallout for the business. That includes addressing the inheritance split if one child never worked a day in your dealership and the other has devoted their life to it. You want to make sure your family won’t be forced to sell at fire sale prices and will be able to continue with minimal conflict or lingering feelings of inequity.
To achieve the best outcomes for everyone involved, prepare for the unexpected by getting a plan in place and continuing to refine it.
Special thanks to Stacey Prince-Troutman, Partner and Chair of the Trusts and Estates Practice at Akerman, LLP., for her contribution to this article. To learn how Stacey and her firm can help your dealership, she can be contacted at Stacey Prince-Troutman.
