Bad Things Happen: Take Steps Now to Protect Your Dealership’s Assets
What would happen if your dealership were sued, or if your business failed and creditors chased after your assets? No one wants either scenario to materialize, but there are certain precautions you can take to protect your dealership’s assets “just in case.”
Set up an FLP
One asset-protecting vehicle worth exploring is a family limited partnership (FLP). In a typical scenario, you transfer assets to the FLP, and as its General Partner you have discretion over how the assets and income are distributed. You then gift or sell limited partnership interests to your children or other family members. A common application is to transfer assets such as marketable securities and/or the real estate on which your dealership is located to an FLP, although other assets also are appropriate.
The agreements are typically written with asset protection in mind, so the underlying assets are usually safe from creditors of the limited partners. Also, if the FLP is properly structured and administered, the assets gifted or sold will be removed from your taxable estate. And transfers of FLP interests might be eligible for minority interest and other discounts.
There are some drawbacks. Your franchise agreement may restrict transferring ownership interests in your dealership operations. Additionally, you’d need to be cautious when signing bank or creditor guarantees — they could undo the FLP’s protective quality. Also, FLPs aren’t the optimal choice for protecting your primary residence.
Create a Crummey trust
Another vehicle to consider is a trust — in particular, a Crummey trust. If you gift assets to someone else, such as your children or other family members, the assets will, generally, no longer be vulnerable to creditor claims. But you may not want to gift assets outright. Instead, you may want to transfer those assets to trusts for your family members. You can retain a degree of control over their access to the funds and provide a measure of protection against their creditors.
Normally, gifts to trusts aren’t eligible for the $14,000 (per recipient) annual gift tax exclusion because transfers have to be of a “present interest” (generally meaning the recipient has immediate access to the funds) to qualify. But in a Crummey trust, after each gift to the trust is made the beneficiaries are allowed — for a limited time period — to withdraw the funds.
This withdrawal right allows the gift to qualify for the annual exclusion, so you don’t have to use up any of your lifetime gift tax exemption (or pay gift taxes) on the transfers. Plus, the assets, along with any future appreciation on them, are removed from your taxable estate.
The downside: Once transferred, you’ll no longer have access to the assets. And there’s a risk that the beneficiary will take out the funds during the withdrawal period.
Establish an offshore trust
You can set up a trust in a foreign country with more favorable asset protection laws than in the United States. Cash or readily movable securities, rather than real estate, typically fund offshore trusts. Bear in mind that even if the assets are offshore you are liable for paying taxes on the trust’s income. And the trust assets can still be subject to gift or estate taxes.
Offshore trusts offer protection from U.S. legal judgments and discourage litigation because of the expense and difficulty in pursuing a case under foreign jurisdiction.
But there are minuses: The costs to set up and administer offshore trusts can be high, making them a sensible choice only for individuals with sufficient net worth and risks of claims and lawsuits to warrant the expense. Because these trusts often face IRS challenges, get solid legal and tax advice.
Way to go
Whatever way you choose to guard your assets, the important thing is that you take that step. Talk with your CPA and attorney for guidance as to the best path for you.