An Estate Planning Opportunity for Dealership Owners
Dealerships have been negatively impacted by COVID-19. There are programs that may have stopped the financial bleeding in a sense, but the future remains uncertain. For dealers in the process of selling, this may have complicated the process. Deals are still closing but some banks have become more selective and squeamish buyers have altered timelines or revisited other terms. For dealers in a position to create an estate plan, this is a window of opportunity and cause for urgency.
We’re standing at the intersection of two big opportunities in estate planning, both with expiration dates.
First, many dealerships weathered blows that will set 2019 back a decade in terms of volume and earnings. While publicly traded dealer groups have voiced their optimism about the speed of a recovery, they have nearly all taken impairment charges on goodwill in their first quarter 2020 financial statements. Optimism has fueled share prices for these companies to recover from their low points. Still, in valuing goodwill, valuators are required to take a more realistic approach.
The pandemic has had a real impact on 2020 earnings and has left uncertainty surrounding the speed at which a recovery is most likely to be made. Demand is still impacted by consumer confidence, supply by manufacturer closures, and capital expenditures and efficiency by state health guidelines. Valuations for estate planning, which incorporate factors known or knowable as of the valuation date, are reduced by many of these factors. Furthermore, industry-specific factors and dealership-specific financial outlooks also play a large part in determining future earnings and dealership values.
These lower valuations present an opportunity to transfer dealership assets to trusts or future generations at their current, depressed values. If the best-case scenarios play out, the value will appreciate after transfer.
Next, the change in tax laws at the end of 2017 temporarily increased the lifetime gift and estate tax exemption. For 2020, the first $11.58 million, or $23.16 million per married couple, of an estate value is exempt from federal tax. Any value above that threshold is subject to federal tax at a rate up to 40 percent. Business owners also need to consider state-level estate taxes. Although state estate taxes are generally lower rates, the exemption limits are currently lower.
The temporary provisions will sunset at the beginning of 2026. Assuming no changes or extensions, the exemption amounts would return to less than half of the current levels. Given the federal and state spending demanded in response to the COVID-19 pandemic, it’s conceivable that more imminent changes could be made to these exemption amounts.
While financial downturns have averaged once per decade lately, this situation is unique. Estate tax exemption amounts are at the highest level since the tax was established over 100 years ago. The exemption is more than five times the 2008-2009 exemption. This may be a once-in-a-generation situation for dealership owners.
Reduced business valuations for estate planning purposes and the temporary increase in federal estate tax exemption amounts have created a temporary opportunity for dealership owners to transfer estates. Capitalizing on this opportunity requires a deep understanding of the automotive industry, business valuation, and estate tax planning. blumshapiro’s Dealer Services Group is a team of professionals entrenched in these areas of expertise. Please reach out to discuss your unique situation.