Restructuring a dealership to avoid estate tax complications is tricky, but it is black-and-white in the tax code.
Although there are several ways to ease the estate tax blow, the main weapon of First Financial Resources - a financial planning firm in Irvine, Calif. - is to create a reorganized corporation with a different tax structure for the dealership. It is called an 'S corporation,' and has the same tax characteristics as a family limited partnership.
The interest in the dealership is divided into three parts: 1 percent voting stock that is retained by the patriarch (or matriarch), and two 49.5 percent minority shares of nonvoting stock that are transferred into a special trust. The minority shares have reduced asset values for tax purposes because they are nonvoting.
Corporation law allows a person to exchange stock in his company for stock in a different form without paying taxes - so exchanging 100 percent voting stock for 1 percent voting stock and 99 percent nonvoting incurs no taxes.
From the two minority shares, a 'grantor retained annuity trust' requires income to the patriarch to continue via annual dividend distributions, which means the owner will continue to get cash flow for a specific number of years. At the end of the trust's term, providing the patriarch is still living, the trust no longer will be counted as part of the estate; it has basically paid itself down to zero.
At that time, the patriarch can reacquire the minority shares from the trust in exchange for a note that accrues interest - which creates a liability for the estate and zeroes out the value of the minority shares for tax purposes.