Estate planning a priority for dealers


Erin McKee

Stop right now and ask yourself: “What is my priority today?”

The majority of you reading this article will likely answer something like making your sales quota or your next dealership acquisition.

Take another moment. Reflect on what really means the most to you, not just today, but every day. What is your answer? It is likely your family.

You’ve dedicated yourself to building your business. And whether you plan to pass it on to the next generation or to a third-party buyer, identifying who that will be is reassuring. But it also raises several issues that should be addressed.

Careful planning will not only safeguard your stakeholders’ economic situation, but it will stabilize what is most important, your family harmony.

Automakers are pressing dealers to have a plan in place now. Most OEMs require it of their dealers. General Motors even issued a statement advising dealers to have one in place.

Dealer principals should identify both management and ownership successors for their business in a clearly laid out succession plan.

This can be one of the most emotional and complex tasks an entrepreneur will face. We do hear principal’s state that they’re still too young to start their planning. But it’s important to note that the earlier a plan is devised on how to exit a business, the more options available and the more assets can be preserved.

It’s Never Too Early

A popular planning strategy is to execute a corporate valuation, followed by an estate freeze, then the subsequent issuing of preferred shares.

Although this can be an advantageous approach, it has been proven valuable to combine your plans with the purchase of a permanent corporately owned life insurance policy.

This type of policy can provide as many financial benefits to the insured while alive, as in death. Take money from your operating company, deposit it in the insurance and you see a vested, annual, stable tax-sheltered return.

We have seen business owners use the values built up on their balance sheet to further assist in growing their business. This is a powerful financial tool when used to support the underlying needs of the business.  

Using the right kind of permanent insurance in your corporate succession planning, you create an opportunity to further take advantage of a tool called the capital dividend account (CDA).

The CDA allows a business owner to pay tax-free dividends to shareholders. Over the years, we have found that the majority of dealers are not receiving this advice. In fact, the most common response we receive is “Why hasn’t anyone told me about this before?”

At mortality, the proceeds of the policy is paid out to the company tax-free, back-stopping the value of the preferred shares, funding the succession plan and paying taxes.

Designing a plan that has no funds in place to execute it will not be helpful.

A dealer should have this asset built into the plan to stop the sale of the business at a discounted price should the dealer pass prematurely or a quick-sale is required.

Taxes can, and often, do cripple even the most successful of companies.

Cash, during difficult times, does not ease the emotional pain but certainly helps by easing the financial stress.

A properly funded plan can eliminate the need to sell businesses, or until the timing and price is right. By using the proper techniques the results are compelling.

The Numbers Don’t Lie

As PricewaterhouseCoopers states: “Life insurance can perform ‘tax magic’ – actually making the date-of-death tax liability disappear.”

It provides business owners all the planning options and security necessary for the distribution of maximum estate values while having access to capital while living.

Only 55 per cent of dealer principals have some form of a succession plan in place.

Of those, 63 per cent intend to fund this liability through their life insurance. Shockingly 70 per cent of that insurance is term insurance.

For a male, age 55, non-smoker, at standard rates, the expected mortality age is 86. Most term insurance expires at age 85. So ask yourself: “Do I have the right insurance product in my planning?”

Term insurance should only be used to solve a temporary need. Our mortality and the taxes due at that time are inevitable.

It is important to plan for both. Make sure you own the right policy. Have your succession plan, contingency plan and life insurance policies reviewed by an experienced life insurance broker who understands your business.

Protect your family and implement a funded succession and management plan. Remember, if you fail to plan, you plan to fail.

Erin McKee, business manager of Firstbrook Insurance Group, is an insurance broker and manages all individual life and disability insurance clients in the firm. She has extensive experience in the insurance industry and working directly with dealer principals and their families. Erin can be reached at 416-486-1617 or