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Why Betting on Yourself May Be the Best Succession Plan

Posted 5:12 PM by

Curved Road

There is a chasm left in the trucking industry by the mass retirement of baby boomers – one that is struggling to be filled by the millennial generation. While this void has been felt by the entire industry as one of the contributing factors to the ongoing driver shortage, it is not the only impact the changing generation has had on transportation companies. As operators pass the baton to the next generation, it is imperative this transition is executed in a tax-efficient manner that accomplishes the ultimate goals of the company.

While foresight is not always perfect, having a realistic expectation of the future of the company can greatly impact the transition strategy. A great succession tool to consider is a grantor retained annuity trust (GRAT). GRATs allow business owners to pass ownership to successors at a fixed point in time, while accumulating the growth within a trust. GRATs can be structured to minimize any current gift value and tax.

GRATs provide trucking operators a short- or long-term exit strategy without losing immediate control, while at the same time, betting on the company’s growth. Conversely, transferring ownership that ultimately depreciates in value will result in an ineffective transfer. If future growth of the company is projected, betting on this application could save substantial tax dollars that would otherwise be subject to gift or estate tax.

A GRAT can be established by using a portion of the grantor’s lifetime gift exemption, or in the case of “zeroed-out GRATs,” none of the grantor’s lifetime exemption. The GRAT is required to make an annuity payment back to the grantor using the applicable federal rate set by the Internal Revenue Service, which is currently about 2%. This payment is usually made from distributions made by the entity so the projected cash flows of the company need to be sufficient enough to support this payment.

Because the trust is a grantor trust, the pass-through income related to the shares owned by the GRAT can be taxed on the grantor’s tax return. This provides greater tax planning, by keeping the value of the GRAT’s assets intact.

There are three key questions to consider with a GRAT:

  1. Will there be a taxable estate (2015 estate tax exemption is $5.43 million per individual)?
  2. Is substantial growth projected in the trucking enterprise?
  3. Is a mid- to long-term ownership transfer strategy desired?

If the answer to all of these questions is yes, this may be a strategy to consider.

Utilizing GRATs is just one of many ways to navigate a transition. Other planning opportunities such as defective grantor trusts, family limited partnerships, or employee stock ownership plans (ESOPs) could also be considered. 

This article appeared in McLeod Software's The Dispatch, August edition. 

About the Author
Randy Hooper is a director in Katz, Sapper & Miller’s Transportation Services Group. Randy helps carriers realize greater company value by advising them on corporate structure, strategic tax planning, and by providing general business guidance. Connect with him on LinkedIn.

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