LOS ANGELES - In line to inherit his father's eight Connecticut car dealerships, Joe Crabtree discovered he would not inherit much of anything.
Turns out that Crabtree would have had to sell the stores to pay the steep estate and income taxes due to the Internal Revenue Service upon his father's death.
It was a good thing Crabtree found this out while his father is still alive, since it allowed the family to restructure the assets so that the children could inherit the Crabtree dealer chain, worth $50 million. Meanwhile, the elder Crabtree, now 70, can continue to earn wealth from his stores and keep control of them.
As the federal tax code now sees it, the elder Crabtree's dealerships are now worth about $10 million, which will leave an estate tax bill that his children can afford, while still being able to hang on to the dealerships.
But the family scion was so disgusted with his run-ins with tax law that he quit running his fledgling California dealership empire and started helping his fellow dealers.
'If my Dad had passed away in 1993, we would have had nothing. The IRS would have scooped it up and taken it away. We thought we had done everything. We had intelligent and expensive advisers,' said Crabtree, 41.
After selling Toyota of Long Beach (Calif.), Crabtree became a principal with First Financial Resources in Irvine, Calif., a financial planning firm specializing in estate taxes and investment planning for 15 years.
'Dealers don't understand the problems of how to pass on their assets to the next generation. They say, 'I've talked to my attorney. I've talked to my accountant. They'll take care of it.' But there's a lot more to it than that,' Crabtree said.
Where does the damage come from?
Currently, the IRS levies a 37 percent estate tax on assets worth more than $1.2 million from a couple, or $600,000 from an individual, that is passed on to the heirs.
But that tax escalates to 55 percent for assets above $3 million, with an additional 5 percent surtax for assets above $10 million. For a dealership chain carrying $20 million in inventory and land, that's a $11 million tax hit.
'The problem is that you have illiquid assets in the form of the dealership (such as land and inventory) vs. estate taxes due in the form of cash,' said Stephen Wolff, president of First Financial. Not many people have that sort of cash on hand.
People who think a living trust will bypass these problems are wrong. All a living trust does is allow the estate to bypass probate, but it does little else, Wolff said.
Perhaps the worst part is that those heirs forced to sell their parents' dealerships to pay taxes will never see anywhere near the dollar value of its actual worth.
'It's a forced sale, so you'll be lucky if you get 55 cents on the dollar. So you're getting taxed on an asset value that you'll never hit when you sell,' said Richard Falzalore, a principal with First Financial.
On top of that, the IRS takes another 45 percent estate tax, as well as additional income taxes and excess accumulation taxes from remaining annuities, IRAs and 'tax-free' retirement plans bequeathed to heirs. Those three taxes can confiscate as much as 85 percent of the original value of those retirement plans.
First Financial uses 'S corporations' and annuity trusts to lower the tax value of the dealership, while still allowing the patriarch to maintain control and income flow from his assets.
Through an outside law firm, First Financial has contacted General Motors, Toyota and Mazda to work out a restructuring of their franchise agreements to allow this sort of dealership restructuring, Crabtree said.