What works? - automobile dealers; succession and estate planning

Should a dealer keep control of his estate's affairs through legal means, the respect of his relatives - or through threats of leaving them out of his will?

A dealer needs to use all available methods to control his business and the affairs of his estate including legal and emotional. Why is this important? Because control is important to most auto dealers I have ever worked with and fear of losing control prevents dealers from making important decisions that would significantly improve their business succession and estate planning.

Recognizing the importance of control, how can you maintain control and successfully change your taxable estate? Let's look at the three ways you control what happens in your dealership.

"Legal" control - that's simple - if you own 100 percent, what you say is the law. Even to a lesser degree if you own 51 percent, yours is the final word. If you feel it is essential that you be in this position, then now is not the time to make a change.

Even dealers who feel this way, however, should consider the possibility of re-capitalizing your stock into voting and non-voting common stock. This can be done whether you are a C or S corporation without adverse tax consequences.

The non-voting stock then can be sold or gifted to your children with you continuing to maintain control. Obviously if yours is an S-corporation this may impact your income so you will need to review the alternatives with your legal and accounting advisers.

As long as you own a majority of the voting shares, your shares will be valued at a premium. By re-capitalizing, however, you can significantly diminish the overall taxable value of your shares of stock. And remember, it is rare when most dealers are forced to utilize their "legal" control in order to have their decisions followed by family or employees. If you are forced into this "legal" position, a whole lot of things are out of control.

"Dad" control, while overlooked by many, it is generally the basis for most family members doing what you want. In the overall scheme of things it is the most effective method because it is based on love and respect, both of which you have earned. When your children respond to "Dad" control, it is because they trust you and want to follow your lead. It is clearly the most satisfying and rewarding method of control. If this isn't working maybe you need to re-examine how you are relating to your family members.

Unfortunately, children don't always do what their parents want, so what is left if a dealer has given up "legal" control and "Dad" control isn't working?

Fortunately there is usually "Golden Hammer" control still available. Simply put, he who has the gold makes the rules. In most auto dealer situations, the amount of assets that a parent owns are so significant that a child would have to be crazy to risk being disinherited by not following a parent's wishes on major business issues.

So what's the bottom line? Reducing your stock percentage is usually a very emotional subject. You feel like you are being put out to pasture, particularly if you are at the point in your life where you are increasingly inactive on a day-to-day basis. You feel that holding on to your stock will somehow maintain your position. If it weren't for you starting this business, your children wouldn't have had this golden opportunity.

All of these are understandable feelings, but for many dealers who enjoy excellent relationships with responsible, capable heir-apparent children, you need to move past your fears and feelings of being replaced and enjoy the success of your children. Obviously you were there at the beginning and your children's success is due in large part to your blood, sweat and tears. Now is the time for you to express your leadership by taking the action steps necessary to transfer dealership stock to your children who are active in your dealership.

In order to effect a successful transition via the successor addendum and ultimately the transfer of dealer principal to your children, the manufacturers will require stock ownership by your children. For most dealers the succession plan involves your estate paying millions of dollars in estate taxes. Therefore, the dealer who is willing to reduce his stock ownership and ultimately give up legal control will significantly lower the estate taxes and improve the chances of his family winning, not the IRS.

Hugh B. Roberts, CFP, is a partner in The de Vries-Roberts Group, Woodland Hills, Calif., specialists in succession and estate planning for family owned auto dealerships.

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