Case of the Week
George's "Green" Unitrust I
Case:George Green was a man of humble beginnings. He was born in Bulgaria and lived with his parents on their farm. But George was a diligent student and determined to become a successful business owner. After high school, he was able to get permission to come to America to attend college. George applied to several colleges and was accepted as a work-study student at a state college. He lived in the dormitory and worked nights in the cafeteria. On weekends, he moonlighted as a waiter at a five star restaurant.
George was both resourceful and determined to succeed. He enrolled in chemical engineering and studied every spare moment. His work ethic was quickly recognized by faculty. After graduating with honors, he became a graduate assistant and earned a master's degree in engineering.
With his early years on the farm, George always loved nature. He interviewed and became a product development engineer with a company that built emissions control equipment for automobiles. Soon, George met Helen Wilson and they married.
But George was too energetic to stay in one place. After saving $5,000, he convinced Helen that it was time for him to go out on his own. George started a company and initially did environmental consulting. As soon as he could gather and borrow the funds, he also started to produce components for emissions control equipment. After a terrific struggle, the business took off and George began to manufacture probes for company smokestacks. When asked if that was a good business, George responded, "It is a great business. Companies buy my probes to measure their smokestack emissions and then the government changes the rules! They all then have to buy upgraded probes!"
George incorporated the probe manufacturer as Green Probe. Ever the entrepreneur, he later had a chance to buy a company that built converters for automobiles. He bought the assets of that company and transferred them into a new business, Green Converters. Finally, George started a third company to build "smokestack scrubbers" that would clean the emissions from the smoke of power plants. Since there was a huge increase in the cost of energy, power companies began to build more coal-burning plants and his "smokestack scrubbers" from Green Scrubber were in great demand.
Question:George is now 75 years old and finally thinking about slowing down. He owns three C Corporations Green Probes, Green Converters and Green Scrubbers and asks his CPA Arnie Arnst what his options are. "How do I phase back without paying a huge tax bill? I love America, and I support my country, but I HAVE supported my country and would like to avoid a large tax bill!"
Solution:Arnie indicated that a tax-free sale with a charitable remainder unitrust might be an excellent option. He also suggested that George should work with one corporation at a time. He asked George if he had any offers and George replied, "General Auto has talked to me about buying Green Converters, but we have not yet agreed on a price."
Arnie responded that it is essential to create the unitrust before the sale in order to protect the tax benefits. Since George and his wife Helen own 100% of the stock, they can control the timing of the sale. After the unitrust was created, George and General Auto then began negotiations in earnest. General Auto decided that it would not buy the stock. Instead, it wanted to purchase assets so that there would be a new basis in the assets to depreciate. General Auto eventually offered $4,000,000 for the assets of Green Converter.
After conferring with Arnie, George decided that it would be best to sell the assets. The basis in Green Converter's assets was fairly high, since George had bought the assets when he set up Green Converter. He determined that it would be a good idea to accept the $4,000,000 offer, since the basis in the assets was $2,400,000.
But George still wanted to save major taxes by funding a unitrust with his stock in Green Converter. Before accepting an offer, George and Helen transferred all Green Converter stock to a 5% FLIP unitrust for two lives. Arnie served as initial trustee. The unitrust then controlled Green Converter and sold all the assets to General Auto for $4,000,000. With a basis of $2,400,000, there was gain of $1,600,000 and federal and state tax of about $480,000. Because this was an asset sale, rather than a sale of corporate stock, there was gain recognized at the corporate level. The unitrust liquidated Green Converter and invested the $3,520,000. With the charitable tax savings from the unitrust of more than $300,000, the net tax cost to George was under $200,000. Without the unitrust, his personal and corporate tax would have been more than $1,500,000, so he was very pleased with the charitable trust.