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Saturday, April 27, 2024
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Case Studies |
Greenco Gift Annuity Bailout
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Case:
Bill and Clara Green consider themselves very fortunate. Bill was born in Estonia. While he was an infant his parents immigrated to America. He attended high school and State College on the East Coast. After he received an engineering degree, Bill worked for two different companies on the East Coast. He met Clara, married and they have two children, Susan and Harry.
Bill worked for companies that produced different types of industrial control systems. One day, he started working on a control system that would measure various kinds of smokestack emissions. Since the Environmental Protection Agency was now starting to regulate smokestack emissions, Bill thought it would be a great opportunity.
Bill quit his job, took their life savings and started in his garage. He soon hired another engineer and a secretary and set up a C corporation named Greenco, Inc., to produce instruments to measure smokestack emissions. Over the years, Greenco has flourished and grown and now has 30 employees, with customers throughout the nation.
When asked whether Greenco is a good business, Bill responds, "It's a great business. The power companies buy our probes to measure the emissions in their smokestacks. Then the EPA changes the rules! So our customers need to buy updated probes."
Bill and Clara have completed a charitable unitrust bailout of Greenco, Inc., over the past three years. He is now 74 and Clara is 72. They still own the land and manufacturing plant used to construct the smokestack probes. The estimated value of the land and building is $2 million. Over the years, Bill has directed his CPA to take depreciation on the building and the cost basis has been reduced to $200,000.
Question:
How can Bill and Clara transfer the property in a tax-favored manner to Greenco?
Solution:
Bill and Clara believe that it is good for their children Susan and Harry to be given part of the company, but it also is very helpful for Susan and Harry to learn good business skills by purchasing a part of the assets. Bill checks with his friend Gayle Gift Planner to see if there is a solution for the building and land.
Gayle suggests a charitable gift annuity bailout. Bill and Clara would transfer the plant to favorite charity for a gift annuity. Since there is some risk involved with the ownership of the property, Gayle suggests that Bill and Clara deed 10% of the property outright and exchange 90% for a charitable gift annuity. With a total value of $2 million, the outright gift is $200,000 and Bill and Clara receive a gift annuity based on $1.8 million. Bill and Clara agree that a gift annuity of 5.2% is sufficient for their needs, even though the charity could pay a higher rate to them. At the 5.2% rate, they receive a $93,600 annuity. Part of the annuity is ordinary income and most of the rest of the annuity will be long-term capital gain. They also benefit from a charitable income tax deduction of $620,659. Bill thinks that they will be able to deduct this amount over the next four years and is very pleased with the current and future income tax savings.
After receiving the property, the charity negotiated a sale of the building with Greenco. Within a few weeks, Greenco agreed to purchase the property on an installment contract from the charity. Since the public charity is not bound by the self-dealing rules, it is permitted to sell the plant and building to Greenco for a note. The charity would receive the payment on the note and these payments would offset the gift annuity payments from the charity to Bill and Clara.
Several parts of this plan leave Bill smiling from ear to ear. He notes, "We depreciated the building on our personal return once, and now Greenco gets to depreciate it again. This is the best tax planning I've done in a long time!" Bill and Clara also will save almost $200,000 in income taxes from their charitable deduction.
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