Case of the Week
George's "Green" Sale and Unitrust II
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 spent every spare moment studying. 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:Four years ago, George funded a unitrust with the Green Converter stock and then Green Converter sold all assets to General Auto. George is now 79 years old and has been approached by Major Power Company, which would like to buy Green Probe (GP). So George called CPA Arnie Arnst and asked, "What should I do now? I still feel like I am paying a lot of tax. Can I sell tax-free again?"
Solution:Arnie reviewed the situation and shared some good news. The existing unitrust permits additions, so George can add GP shares directly to the existing trust. The income to George and Helen will reflect the added value. Since Major Power wants GP to buy the GP stock, this will be a much simpler transaction. George and Helen need to decide how much stock to sell tax free through the trust and how much to sell outright. With a sale and unitrust, the GP stock given to the trust is sold tax-free and the unitrust deduction can offset the tax on the part sold for cash outside of the unitrust.
Arnie did a "zero tax" sale and unitrust calculation for George. With the total offer of around $5,000,000, Arnie suggested adding $3,000,000 in stock to the unitrust. George and Helen would sell that stock tax-free and the charitable deduction of over $1,000,000 will offset the tax on the remaining $2,000,000 sold outright. Arnie carefully explained that the deduction will be limited to 30% of their adjusted gross income and may be used over the next two or three years, while the remaining tax on the sale will be payable this year. In effect, there will be some tax paid this year on the sale, but the tax savings from the carry-forward deduction will offset that amount by year three.
"So in effect I have a tax-free sale in three years," said George.
"Yes," noted Arnie. "But that still leaves you with the full $2,000,000 cash after the three years."
George carefully transferred $3,000,000 in GP stock to the unitrust and waited four weeks before accepting the Major Power offer. He and Helen are delighted with their unitrust, now worth a total of $8,000,000, and with the $2,000,000 cash they have in the bank. George took Helen on an around-the-world-cruise to celebrate. As they were watching the sunset on the ocean one evening, Helen asked, "George, we have sold Green Converters and Green Probe, but what shall we do with Green Scrubber?"