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Saturday, April 27, 2024
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Case Studies |
The Philandering Philanthropist, Part 4 of 4 - Gift of Closely Held C Corporation Stock
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Case:
John Doe, 77, is a self-made man. Deserted by his parents at a young age, John grew up in a boys' home and on the streets. At the age of 17, he moved to Texas to chase oil and women. With his street smarts and gritty determination, John made millions in the oil business as an arrogant and risk-taking maverick. His fortune with women, however, was not nearly as successful. In fact, John was married - and divorced - four times. To this day, John still claims it was "all their fault" and remains bitter toward his ex-wives. Yet, he continues to date and currently has several "girlfriends." Also, John has six children, but unfortunately, does not have any ongoing relationship with them. He contends that his children are spoiled and ungrateful because he gave them too much while they were growing up. More likely, John's poor relationships stem from the lack of any family structure in his youth and the minimal amount of support given to him as a child.
John does have one love, though: his love for the Home for Wayward Boys which raised him. This public charity is the one and only good memory from his childhood. It was his only family as a child. As a result, he has publicly supported the boys' home throughout his life and privately supported many of the people who touched his life while there.
Although his hours are reduced, John continues to draw a salary of $300,000 as CEO and President of his oil company. John's estate of $10 million consists of a $5 million closely held "C" corporation, a $2.5 million ranch, a $2 million IRA and $500,000 in personal property (i.e., Cadillac, art collection, antique gun collection, jewelry, etc.). John intends to leave his entire estate to the boys' home at his death. However, he would also like to make a major contribution now, so he can see the effects of his gift during his life.
Question:
John wants to know which assets he should give now and which assets he should give at death. John wants to know how to structure his gifts in order to make the best tax-wise decisions.
Solution:
John has two goals with respect to his company. First, he wants his long-time employees to take over ownership and control. Second, John wants to make a large gift to the boys' home. If John could take advantage of income and estate tax deductions while accomplishing both goals, he would eagerly implement the plan.
John's attorney suggests a two-part plan. First, John would begin making transfers of his stock to the boys' home. Each transfer would require an appraisal if the value of his closely held stock exceeded $10,000. In addition, the value would likely be discounted to take into account the lack of marketability and lack of control. Nevertheless, John would receive a charitable income tax deduction subject to the 30% AGI limitation each year that he transferred his stock to the boys' home. Furthermore, John would bypass all of the capital gains tax on the stock contributed to the boys' home.
The second part of the plan involves repurchasing the stock from the boys' home. Fortunately, John's company already has in place an Employee Stock Ownership Plan (ESOP). Therefore, the ESOP (or, alternatively, the corporation itself) would buy the stock from the charity. Over time, the ESOP would begin to gain more ownership in the company and subsequently transfer that ownership to John's employees.
John loves the plan and decides to transfer 10% of his stock each year to the boys' home. Each year the Home For Wayward Boys obtains an independent appraisal of the stock and then elects to sell the stock at fair market value to the ESOP. Therefore, after ten years, he will have completely transferred ownership in his company, greatly benefiting charity along the way.
In the event John dies within ten years, John's will directs that all of his remaining stock be distributed to the boys' home. John's estate accordingly will be entitled to an estate tax deduction. The charity will then sell the remaining stock back to the ESOP, thereby completing the two-part plan and achieving all of John's goals!
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