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Tuesday, May 7, 2024
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Case Studies |
The Trash Talking CRT
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Case:
Hank Scott, 65, and Bill Robb, 55, own a successful partnership that hauls garbage and teaches courses on public speaking appropriately called - Trash Talking. Hank and Bill each have a 50% interest in Trash Talking. They have run the partnership together for many enjoyable years. However Hank, in recent years, has grown weary of Trash Talking. Hank is considering selling his interest to Bill's son, Jason. The partnership is worth approximately $1 million, and its assets consist mainly of trucking equipment, an office building, and land. Trash Talking has debt of approximately $200,000. Hank's basis in the partnership is very low, thus he realizes that a sale of his 50% interest in the partnership would produce a very large capital gains tax.
At a recent local charity function, Hank met Tim Simmons, Planned Giving Director of the local charity. During conversation, Tim learned of Hank's dilemma and suggested that some charitable planning might help avoid those heavy capital gains taxes. In addition, Hank would receive a very nice income stream for his retirement and a good-sized charitable deduction as well. Hank is very interested in Tim's comments and asks if Tim would visit him next week to discuss it further. Tim agrees. However, Tim recalls that partnership interests pose unique challenges, and, consequently, decides to contact a local attorney before visiting with Hank again.
Question:
Is it advisable for Hank to transfer his 50% partnership interest in Trash Talking to a CRT? What unique concerns must be considered with respect to contributions of partnership interests?
Solution:
Interests in partnerships may be contributed to Charitable Remainder Trusts, however there are three rules generally applicable to such a transfer.
1. There is no debt in the partnership.
2. There is no active business income.
3. There is a friendly general partner who will not violate rules 1 and 2.
In this case, we fail the first two rules. As stated above, there is $200,000 of debt in the partnership. Thus, the debt would have to be removed prior to transferring Hank's interest into a CRT. Second, Trash Talking hauls garbage and gives seminars, which is an active business enterprise. Therefore, the income generated by Trash Talking comes not from passive sources but from active ones. Consequently, Hank's CRT could lose its tax-exempt status and be subject to UBTI issues.
As a result of these findings, Tim tells Hank that a CRT would not be advisable for his partnership interest. Fortunately, Hank loved the benefits of a CRT and opted instead to utilize those benefits with a much safer asset - investment land he held in his own name. Therefore, Hank funded a CRUT with his land. Moreover, Hank's CRUT generated a very large charitable deduction, which he happily used to offset the gain from the sale of his 50% partnership interest in Trash Talking to Bill's son. In the end, Hank was thoroughly pleased with this comprehensive plan that allowed him to sell his business interest without the payment of any tax.
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