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Monday, April 29, 2024
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Case Studies |
Three Thousand Shares of Stock, Two Possible Trigger Dates, and One FLIP
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Case:
Sarah Stevens, a 42 year-old CEO and MBA graduate, has managed to build a very successful technology company from scratch. Over the past ten years, her closely held company has grown exponentially. In order for it to maintain this incredible growth, Sarah decided many months ago to take the company public this December. Based upon its business model and current success, Sarah's company is expected to be a "hot" IPO. Sarah also knows that despite her company being worth a great deal, she will continue to receive a lower income until the company can start to turn larger profits. In fact, during the past several years, Sarah has paid herself only a moderate salary as she poured money back into her company.
About this time, Sarah received a call from the gift planner at her alma mater. He told her of a type of gift where she could avoid the capital gains tax on the sale of her stock while providing her with income for a term of years. Because she attributed much of her success to the connections and education her alma mater provided her with, Sarah was eager to "give back." This call piqued her interest so she decided to call her attorney to discuss the matter further.
Question:
Sarah specifically wanted to know if she could avoid some of the capital gains on her soon-to-be-appreciated stock. Also, she wanted to know if she will receive a charitable deduction now and capital gains payouts during the term of the trust.
Solution:
Sarah's attorney, Lawrence M. Steele, informed her that the gift planner was referring to a charitable remainder trust. He stated that Sarah could place a portion, 3,000 of her 50,000 shares, of her closely-held stock in a FLIP charitable remainder unitrust (CRUT) for a term of 5 years. The unitrust would be a net income payout trust and then would "FLIP" to a straight payout trust at the beginning of the year following the trigger event. Essentially this means, Sarah would likely receive no income in the current year but would start to receive an income stream at the start of next year. Mr. Steele stated that he would draft the trust to flip on the earlier of the closely-held stock being sold or such stock becoming eligible to be publicly traded. Reg. 1.664-3(a)(1)(e), Example 2, provides that such a provision would be acceptable.
Therefore, the trustee would hold her contributed closely-held stock with no immediate intention of selling it. However, once the stock was eligible to be publicly traded (the trigger event), the trustee would then sell the stock. This sale would diversify the trust's investments, and allow the unitrust to become a straight payout unitrust on the next January 1. More importantly to Sarah, she would receive for the next five years a payout of 15% of the trusts assets, valued annually. She would also avoid the capital gains tax on the sale of her 3,000 shares of stock and receive a current income tax deduction. Finally, Sarah would make a substantial gift to her alma mater and truly "give back" to a school that gave her so much.
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