Fall Key Advisor. Dealer news and tips

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1 Fall 2015 Key Advisor Dealer news and tips

2 CEO Outlook By Gregg Strong When we think about estate planning, many of us focus on how to minimize taxes when assets transfer to our heirs and beneficiaries. While tax issues are certainly important, comprehensive estate planning covers much more ground than that. Our lead article in this quarter s newsletter addresses the critical role that non-tax considerations perform in your estate plan. Estate planning deals with important family matters and clearly defines your wishes when you die or become incapacitated. Since it tells them exactly what you want, the plan can provide real peace of mind to your family. A thorough estate plan encompasses all assets, including your dealership, primary residence, vacation homes, your digital assets, and other legacies and heirlooms. Planning ahead to transfer ownership of your dealership following your death is one of the most meaningful things you can do to ensure the continued success of your business. Since family members are often involved, many dealers integrate a succession plan with their estate plan. Our newsletter also includes both an economic outlook and an article on how interest rate hedging can help auto dealers manage risk. The coming year promises to be filled with uncertainty, and it s increasingly likely that rates will begin to rise. Interest rate hedging tools can mitigate the risk of changes in rates, allowing you to more accurately project expenses, reduce earnings volatility, and achieve better cash flow certainty. KeyBank is committed to your success and to being the best provider of dealer-oriented commercial financial services in the business. If you have questions or comments, please feel free to contact me directly at gregg_strong@keybank.com. 2

3 Addressing non-tax issues in a dealer s wealth strategy You ve worked hard to build your dealership business over the years, and you want to ensure that the wealth you ve created is preserved. Tax planning is always an important part of the estate planning process; it makes good sense to minimize the tax bite that the government takes when assets are transferred. As important as this is, however, estate planning is about much more than taxes. Death or incapacity always creates an avalanche of emotions for an auto dealer and their family. A comprehensive estate plan that deals with non-tax issues as well as tax considerations can take as much stress out of a difficult time as possible. Family issues Defining your wishes An estate plan addresses important family matters and clearly defines your wishes. Consider the following questions: Do I want to provide direction on where I go for care if I become incapacitated? Who manages the auto dealership when I die or become infirm? Do I want to limit the amount of resources that would be available or would have to be used to provide for my long-term care? Which people or organizations receive my assets when I die? Who takes care of my minor children and how will funds for them be managed? Do I want to avoid the costs, time and public exposure for my family that probate involves? A well-crafted estate plan ensures that these and other important issues are addressed, providing peace of mind for you and your family. Because it tells your family exactly what you want, an estate plan can provide straightforward direction about your preferences. A thorough estate plan addresses all assets, including your dealership, primary residence, vacation homes, and other legacies and heirlooms. It also incorporates your digital assets such as your Facebook page or blog. Your estate plan should address unique family situations, such as the intricacies of second marriages, potential future divorce of children, addiction and irresponsibility, and physical and mental disability, said Matt Logar, Key Private Bank, Manager of Financial Planning. In addition to protecting beneficiaries from themselves, their creditors, and former or current spouses, provisions can be included to ensure that special-needs beneficiaries aren t unintentionally disqualified from crucial government benefits due to an inheritance. Incapacity Estate planning involves a dialogue leading to a clear understanding of who will make decisions for you following disability. Importantly, this must be spelled out in documents that include durable general powers of attorney, health care directives and a living will. It s essential that you appoint a person to make important decisions during difficult situations and one who will do so in a timely manner. It is often best if the agent under your health care power of attorney lives close to you in order to effectively act in this capacity. If leaving an estate or legacy is important to you, different strategies can be implemented to help ensure that it cannot or will not be depleted during your lifetime. This may include long-term care insurance, life insurance, irrevocable trusts and/or immediate gifts directly or through irrevocable life insurance trusts. 3

4 Continued from page 3 Addressing non-tax issues in a dealer s wealth strategy Estate planning is important for auto dealers and their families, even if your current estate is not subject to the estate tax. Estate planning can help address important family issues and ensure your wishes are carried out when you die. Proper planning provides certainty about how the dealership business will be run in the future. A variety of planning strategies are available to help auto dealers and their families address the non-tax issues of estate planning. Business succession Planning ahead to transfer ownership of your dealership upon your death is one of the most meaningful things you can do to ensure the continued success of your business. Succession planning deals with the transfer of management and control of your business to a new manager. Since family members are often involved, many dealers integrate a succession plan with their estate plan. You could do one and not the other, but it works much better when they are prepared in concert. The factory agreement with manufacturers requires that an acceptable successor is in place and that the transition is done in a seamless, efficient way. Manufacturers know that good outcomes are far more likely with a planned transition than if a succession plan isn t developed before the current dealer is gone. Getting the manufacturer on board isn t an issue with most businesses. In dealerships, however, you want the factory to be comfortable with your succession plans as early as possible. It s not unusual for these beneficiary designations to be outdated, lack contingent beneficiaries or simply not reflect the individual s current situation. They should be updated periodically as part of ongoing financial planning. Gregg Strong, President KeyBank Dealer Services In the case of your family-owned dealership, it s important to: Identify who would take over the dealership business in the event of death or incapacity and ensure that the individual or individuals wish to do so. Direct the manner in which non-involved family members are awarded alternate assets of equal value and how the value will be determined. Identify any issues limiting the children s ability to retain the dealership business or existing financial arrangements after your passing. Develop an exit strategy if your family cannot or does not want to own the dealership, including providing the necessary liquidity if the estate is taxable. Put a buy-sell agreement in place if you have a business partner. Don t forget key employees who aren t family members in your succession plan. Figure out how they ll be involved in the business and talk with them about their roles. You also need to determine how you ll replace them if they leave. Clear communications As you prepare your estate plan, make sure to draft a letter with information about personal affairs (important account information, digital passwords, trusted advisors contact information) and address any ethical and moral considerations sometimes called an ethical will or a family mission statement that you wish to impart to the family. Discussing important family issues with your attorney and wealth management team will give them a clearer picture of your wishes and identify potential problems that may need attention. Enlist the help of these professionals today to put these estate planning ideas into action. 4

5 Managing interest rate risk with a hedging strategy After years of maintaining short-term interest rates at near zero, the Federal Reserve is signaling that it will begin transitioning to a higher rate environment. Auto dealers have worked hard to succeed in a period of low rates, and they must now prepare for the impact that rising rates will have on cash flow and profitability. The good news is that there are resources to help you manage risks caused by interest rate volatility. By using tools known as interest rate hedges as part of a comprehensive financing strategy, you can control borrowing costs and bring more certainty to your business. Designing an interest rate hedging strategy The first step in managing interest rate risk is to identify and quantify your dealership s exposure to changing rates, including the impact on revenue growth, margins, interest expense, and debt covenants. The analysis must be comprehensive, covering all variable-rate term loans, real estate debt, lines of credit, and leases. The next step is to determine the suite of interest rate hedging tools that can be used to address the risks you ve identified. A wide variety of alternatives are available, and your strategy should be based on your unique circumstances. For example: Your dealership may want to use a floating-to-fixed rate hedge to take advantage of today s historically low floating rates while limiting exposure to future rate increases. You might choose to fix the rate on a portion of your floating rate borrowing with an interest rate hedge, which also preserves the flexibility to prepay a portion of the loan without penalty. Your dealership may be using a delayed draw facility during the construction phase of a project. With a forward hedge strategy, rate protection can be achieved by initiating an interest rate swap at the estimated time of completion. You could also use a forward hedge prior to closing a loan if you are concerned that rates will increase before the new loan is issued. If the outstanding balance on a line of credit is not anticipated to fall below a certain level over the next few years, you could hedge that amount while leaving any incremental borrowing at a floating rate. If your dealership has an existing hedge, you may be able to take advantage of the current market environment to lower the fixed rate by executing a blend-and-extend modification. Gaining the benefits of a customized strategy Whatever the hedging strategy, interest rate risk management allows dealerships to more accurately project interest expense, reduce volatility of earnings, and achieve better cash-flow certainty. Most importantly, hedging lets auto dealers focus on managing daily operations instead of trying to forecast rate movements. Working with a seasoned interest rate management expert one that will take the time to educate you on financing alternatives goes a long way toward making implementation as seamless and successful as possible. This material is presented for informational purposes only and should not be construed as individual tax or financial advice. KeyBank does not provide legal advice. 5

6 Economic Outlook by Bruce McCain, Chief Investment Strategist, Key Private Bank Key is a recognized leader in helping clients achieve energy efficiency and renewable energy, and our experts are armed with the resources, connections, and financing to design and implement unique solutions. Our support for a greener environment doesn t stop there, because we re hard at work building a culture of sustainability throughout Key. The recent equity decline reflected investor anxieties about deteriorating growth. The recovery suggests public anxiety has calmed, but for a solid rally to continue, the economic indicators need to turn more positive. As yet, signs of improvement have proven inconsistent. Still, despite disappointing numbers on consumer spending and weak factory activity, there is no broad evidence of an oncoming recession. Most U.S. indicators remain well above levels that forecast a strong probability of major economic decline. While a recession does not seem highly likely, the odds of rapidly accelerating growth also seem limited. Continued, sluggish growth seems the most likely outcome as long as the economy can halt its slide toward slower production. A close monitoring of the trends will, therefore, remain important in the coming weeks. Consumer spending Consumers should be best able to add to growth, but improvements have been inconsistent. After stronger spending growth last month, the rate of improvement decelerated again this month. Personal income growth also slowed, although spending power still improved after adjusting for inflation. By now, the public should recognize that lower energy costs will continue to provide more money for other spending. That spending power represents one of the best opportunities for stronger economic growth. Business activity The business sector has been the weakest part of the overall U.S. economy, as factory activity has gradually slowed. Weaker consumer spending, inventory reductions, sluggish trade and a strong dollar have all taken a toll on domestic business production. Yet auto sales have been strong and consumer spending seems likely to provide continuing support for manufacturers. Production data show that a great deal of the industrial weakness to date has been due more to reduced mining and energy production than manufacturing or utility activity. The energy drag on production should wind down soon. While energy production is unlikely to recover any time soon, the overall economic statistics will at least look more encouraging as the year-over-year comparisons become easier. Part of the slowing is also attributable to efforts to reduce inventory levels. As inventories come under control, production should increase, particularly if sales accelerate. Excluding inventory reductions for the third quarter, GDP growth would have been a relatively strong 2.9%. The outlook for exports is not as positive. Weak international trade volumes and a strong dollar will remain headwinds for U.S. exporters. Weak overseas growth and strong monetary stimulus in major exporting nations make it unlikely that U.S. exports will make strong contributions to growth in the coming months. Overseas growth Although international economies do not show strong signs of recession, many still struggle with exceptionally weak economic growth. International trade has continued to decline, with volumes down 1.6% this year and the value of total trade down 6.5%. Weaker currencies relative to the dollar will provide an offset to weak trade volumes for some countries, but most major exporting nations will continue to feel trade pressures. Thus, even falling currencies may not allow most countries to overcome their growth problems. As long as economic growth remains weak and inflation remains low, major monetary and fiscal interventions seem likely to continue for some time. As a service to our clients, KeyBank is providing this brief overview to raise client awareness. KeyBank does not make any warranties regarding the results obtained from the use of this information. The information and recommendations contained herein is compiled from sources deemed reliable but is not represented to be accurate or complete. In providing this information, neither KeyBank nor its affiliates are acting as your agent, broker, advisor, or fiduciary, or is offering any tax, accounting, or legal advice regarding these instruments or transactions KeyCorp. KeyBank is Member FDIC. All credit products are subject to credit approval. ADL