Thoughts on how to transfer a dealership to a family member

For the past several of months we have talked about creating different classes of equity for the purpose of granting different economic rights and different control rights to various owners of a company. The advantages of such a flexible equity structure are readily apparent when dealing, for example, with a key employee who becomes a minority shareholder or an outside investor who wants preferential treatment for the money he puts into the company. 

Another interesting opportunity presented by creative equity structures is in the area of estate planning.

Suppose a dealership is owned by a single owner-manager who is concerned about eventually transferring the business to his children. With current depressed values in the industry (as we have discussed in other blogs), it is possible to make tax-free gifts of substantial interests in a company without paying any gift tax. 

On the other hand, the dealer may not want his children to play an active role in the management of the company at this time, or he may have one child who is a prospective successor manager of the business and other children who will never be other than passive investors. 

In that event, gifts that represent a valuable participation in the future value of the company can be made in the form of non-voting stock or stock that has limited voting power. The effect of this is to keep control of the business in the hands of the current owner while transferring a substantial part of the current value (and a large part of future appreciation of the value of the business) to other family members and thus avoid future estate taxes. 

Let’s take a simple example: Assume a dealer has a son who is actively involved in the business and wants to know that he can step in and take over some day as a condition to continuing to work as an employee for the time being. In that case, the father-owner could issue some stock to the son now as a gift, and enter into an agreement that allows the dealership to redeem (or the son to purchase) all of the current owner’s stock at a set price, at say age 65. This provides the current owner with a guaranteed payment to fund a comfortable retirement, and it guarantees the son that there will not be a change of his father’s mind. The son has a right to buy the stock provided only that he is prepared to run the company in a way that generates enough money to pay Dad off. The arrangement also may have estate tax benefits (subject to some fairly complex rules that would have to be evaluated) by establishing the value of the current owner’s stock for future gift and estate tax purposes.

DISCLAIMER: This blog is a highly simplified general discussion.  It is not legal advice. Such advice should come solely from qualified legal counsel who understands your situation and who is familiar with all relevant facts, variations in state and local laws that may apply to you, and other matters beyond the scope of this blog.