A Succession Bridge Case Study
By Loyd Rawls
Empowerment of a Successor Manager is a critical estate planning issue. Other succession-related estate planning maneuvers are in vain if this subject is not addressed effectively. A Succession Bridge is an excellent alternative to the profound handicap of management by an inexperienced, uninvolved trustee. The total concept of a Succession Bridge is too broad to address within this article. However, the following experience should illustrate how one of the varieties of a Succession Bridge played a significant role in estate planning.
Case History: The Bingler Family
This Succession Bridge involved a client whom we will call Tom Bingler. Tom was a 42-year-old second-generation auto dealer. He and his wife, Sandy, had two children, a 15-year-old son and a 12-year-old daughter. Sandy was a full time mother with good business judgment, but no firsthand experience in running an automobile dealership. Tom's son professed that his dream in life was to become an automobile dealer just like his dad and granddad. Tom's charge to me was to find a way to provide estate liquidity for Sandy and his children, as well as continue the business for the next 15 years in the event of his death. He felt that if his son was not ready to take the business over at 30, then he never would be.
Larry, their GM, was 50 years old and had been working with Tom for over 20 years. He was capable of managing the dealership and both Tom and Sandy trusted him without question. I felt Larry was a perfect candidate for a Key Man Contingency Succession Bridge.
As a result of my urging, Tom asked Larry if he would continue to manage the business on behalf of his family if something happened to him. Larry reluctantly agreed. I suggested that, we plan to utilize a trust to hold the business in the event of Tom's death, designating an advisory committee consisting of Sandy, her brother who was a local business attorney, and one of Tom and Sandy's close friends who owned a dealership in a neighboring community. Sandy was given the right to remove and replace either of the other advisory trustees. In the event of Sandy's death, the other two members would choose her replacement.
The trust agreement stated that, in the event of Tom's death, within 15 years, Larry, assuming he was still the GM, would be sold 25% of the dealership. He would report to Sandy as the representative of the advisory committee and meet with the full committee once a month. Larry's continued ownership of the stock was stipulated in the trust in an accompanying Stockholder's Agreement, to be contingent upon his continued employment until age 65.
To facilitate the purchase of the stock and to provide a continued employment incentive, we organized a life insurance trust and purchased a million-dollar policy on Tom's life within the trust. The trust specifically stated that, in the event of Tom's death, within 15 years the proceeds of the insurance policy would be utilized to purchase the 25% interest in the dealership for Larry. The Stockholder's Agreement also stated that if Larry became a stockholder, his stock would be redeemed at age 65 to provide him a very generous retirement benefit.
If Tom lived beyond 15 years, the GM's interest in the irrevocable life insurance trust would lapse, and Tom's two children would become the replacement owners or beneficiaries of the pure life insurance. We arranged for payment of the $20,000 annual premium on the $1 million policy on Tom's life by the corporation on a split-dollar premium loan basis to maximize cash value buildup. We dedicated the cash values of this policy to fund a Supplementary Executive Retirement Plan for Larry in the event Tom lived another 15 years, as expected.
The net result of the structure was that we provided locked-in successor management that would help Sandy and her son to continue the business in the event of Tom's premature death. This was accomplished by empowering Larry to purchase 25% of the business as compensation for assuming the responsibility of managing the dealership for Tom's wife and children. In addition to 25% of the equity, Larry would have the operating incentive of participating in profits through Subchapter-S dividends. The Contingency Succession Bridge also provided the general manager a "thank you" incentive if Tom lived, and the stock purchase was not activated in the form of a golden handcuff salary continuation program funded through the cash values of the life insurance policy funding the buyout.
It also bears mentioning that other benefits included guaranteed estate liquidity for Sandy and the children. If Tom died within 15 years, they would have a million dollars cash in exchange for 25% of the business; and if Tom lived beyond 15 years, the irrevocable trust retained the policy's death proceeds for the direct benefit of Sandy and the children.
Prior to formalizing this successor planning arrangement, we submitted our plan to the proper successor dealer administrators at Buick Motors. The franchiser's primary concerns were the qualifications of Larry to be the successor dealer. Due to his experience and good standing with factory managers, he was quickly approved. Their secondary concern was the actual structure of the documents. Buick's attorneys reviewed the documents and confirmed that Larry, not Tom's wife, would be in control of operation and that Larry would own stock in the corporation to provide him a vested interest.
It bears mentioning as another important estate planning issue that franchise organizations, such as General Motors, Ford, Anheuser Busch, Miller and McDonald's, consider the franchise as the delivery arm of their business. In most cases, the franchise agreement stipulates requirements for the successors of that franchise. The manufacturer/ franchiser realizes the critical importance of highly qualified managers for the delivery of their products and services. They are very serious about their requirements regarding the qualifications, attitude and, in most circumstances, vested interest (ownership of a portion of the business) of the designated successor franchisee, dealer, wholesaler, etc. In most circumstances there is too much downside risk (loss of the franchise) to assume that your general estate plans and specific trust provisions have complied with the contractual requirements for franchise succession. Therefore, it is highly recommended that you and your attorney read and understand the succession provisions of the franchise agreement and conform your estate plan to these provisions. Then you can send your franchiser an explanation of your plans and request their approval in writing. Any other course of action is equivalent to rolling the dice for the family jewels.
Loyd H. Rawls, CLU, ChFC, MSFS, of The Rawls Company, Orlando, Fla., has specialized in family estate and succession planning for closely held family owned businesses since 1973. lrawls@dealeronline.com
