Car dealer’s succession plan drives case study analysis

The “Dream Team” selected by respondents to Lincoln Financial’s survey analyzed a case study of a hypothetical Fairfield, Conn., couple with a combined net worth of $22 million.

George Duncan, 65, is the president and majority stockholder of Duncan Motors Inc., a Jaguar-BMW-Hummer dealership.

Originally Mr. Duncan had a partner, but when the partner died, Mr. Duncan bought out his partner’s portion of the business. The sale was funded with $300,000 of insurance that Mr. Duncan had on his partner on a cross-purchase buy-sell plan. The purchase price was based on book value.

The dealership has a book value now of $10 million and generates $800,000 in annual profits – beyond Mr. Duncan’s $500,000 salary plus $500,000 bonus. After his partner’s death, Mr. Duncan brought his own daughter, Jane, 35, into the business. She is now the dealership’s general manager.

Mr. Duncan fully intends to turn the business over to his daughter. He has gifted 8% of his stock to her over the years, using up $600,000 of his gift tax exemption and intends to continue to gift as much as he can to her within his remaining and increasing exemption.

The dealership land and the building is owned by the Duncan Family Partnership, a limited partnership set up by Mr. Duncan six years ago. Mr. Duncan and his wife, Mary, own 90% of the partnership (2% general partners each and 43% limited partners each), and Jane and her brother, Bob, each have 5% limited partnership interests.

The estimated fair market value of the property is $4 million, subject to a mortgage-debt balance of $1 million, which is being covered by the $400,000 in annual rent paid to the partnership by Duncan Motors Inc.

Mrs. Duncan, 62, is not involved in the dealership, but she is general counsel of a growing medical specialty company, MedSpecs Inc., that trades over the counter. She has $4 million of restricted stock (basis of only $400,000) in the company. Her salary and bonus total $200,000 per year.

The couple jointly own an $800,000 home on the Long Island Sound, a $400,000 condo in Boca Raton, Fla., and a $600,000 house in the Turks and Caicos Islands. Mortgages on the properties total $800,000.

In addition, the couple have $2 million in a joint brokerage account that holds diversified stocks, other securities and mutual funds. Mr. Duncan’s profit sharing plan at Duncan Motors is worth $300,000, and Mrs. Duncan has $500,000 in a profit sharing plan at MedSpecs.

The couple are in very good health and are reaching a point in their life at which they would like to scale back their work schedules in order to have more time with their four grandchildren and become involved in charitable affairs. They have classic A-B-type wills and trusts, and $400,000 of second-to-die life insurance on themselves to cover estate taxes.

They pay the $40,000 annual premiums as gifts to the trust that are well within their annual gift tax exclusion. They are wondering about reducing that coverage in light of the estate tax reductions or repeal possibility.

Analyzing the case study were Randi A. Schuster, principal of BDO Seidman LLP in New York; Margaret Welch, managing director at Sullivan Bruyette Speros & Blarney in McLean, Va.; Arthur H. McGonigal Jr., a financial planner at Sagemark Consulting in Vienna, Va.; Frank Mirabello, a law partner at Morgan Lewis & Bockius in Philadelphia; and Gary Nestler, estate planning counsel for Salomon Smith Barney Inc. in New York. The round-table moderator was Wes Thompson, CEO of Lincoln Financial Distributors.

Mr. McGonigal addressed the Duncan case study by suggesting that, although facts and circumstances vary dramatically from client to client, the process is still very much the same. “It starts and ends with good data. Be that one, two or five meetings, you need to get good objective and subjective data about the case,” he said.

Dream Team members concurred that once the information was gathered, and the issues and objectives of the client were assembled, it would be up to the advisers to come up with a plan together, instead of suggesting a range of things that might confuse the client. “I think the clients have to be presented with a set of conclusions from the team itself, as opposed to, `We’ll divide this up,”‘ Ms. Schuster said.

“You certainly have to start with the business,” Ms. Welch said, “coming to the nitty-gritty about how it’s going to be passed to Jane in terms of operating it, and what’s left over.”

The panel ultimately decided that getting the business issue resolved is the first priority. Mr. Mirabello suggested that because the Duncans already have a family partnership, the company could probably be recapitalized into non-voting and voting stock. It also agreed that the Duncans should be committed to a gifting program – whether it be annual exclusion gifts to fund the insurance or using up the rest of their credit to create a trust for Jane.