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Wednesday, May 1, 2024
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Case Studies |
Swenson "Early" Retirement, Part 1
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Case:
Bill and Clara Swenson consider themselves very fortunate. Bill was born in Norway. When he was seven years old, his parents immigrated to America. He attended high school and State College in Northern Minnesota. After he received a business degree, Bill moved back home and started a snowmobile and boating dealership. He and Clara worked very hard and now own two other dealerships. All are proprietorships. They also bought a small hotel and four commercial properties in town.
Bill and Clara are now age 68. As Bill says, "My father worked until age 75, but that's not my plan. I fully intend to take early retirement at age 70."
What retirement plan will work for Bill and Clara? They have a substantial IRA and also have certificates of deposit. But Bill would like to sell and spend the winters in Arizona. He and Clara are also ready to give up management of the hotel and the four commercial properties. They would like good income and want to give a reasonable inheritance to their four children. As Bill says, "We started with nothing, and we want to give them some help. But they should also have the opportunity to use their talents and education to make something of themselves.”
Bill and Clara support the Norwegian Heritage Center and several local charities that assist youth and those in need. When asked if they would be willing to look at a plan to reach their goals, Bill responded with a hearty, "You betcha!"
Question:
Can Bill and Clara sell the dealerships tax free? Where should the plan start?
Solution:
Bill and Clara have previously funded a charitable unitrust plan with two commercial properties. They now are talking to two different potential buyers of the snowmobile and boating dealerships. Since they enjoyed the tax-free sale and charitable deduction benefits of the unitrust, Bill suggests that the dealership should be placed in the unitrust and sold.
But there is a problem. A unitrust is exempt from tax if it is not running a business. So how could Bill and Clara transfer their business to a unitrust and sell tax-free? With an operating business transfer to a CRT, there is a 100% excise tax on the UBI. Sec. 664(c)(2)(A). While the tax may not be large if the asset is sold quickly, Bill wants to minimize the tax on UBI.
Bill spoke with their CPA Susan Greene and discussed options. Susan suggested a plan to sell the business with a very small tax.
First, she contacted a business broker and discussed possible options for sale of the business. Fortunately, there was a potential buyer who expressed interest. Susan told the broker to keep the buyer “warmed up,” but there was no agreement or contract for sale of the business. Next, Bill and Clara signed a charitable remainder unitrust and then transferred the business into the unitrust with CPA Susan as initial trustee. Third, Susan as trustee contacted the prospective buyer and negotiated a sale of the business.
Within three weeks, the sale was completed. The unitrust sold the business and bypassed the capital gain on the sale. There was a modest amount of unrelated taxable income that had to be paid to the IRS as an excise tax, but that was a small cost compared to the tax savings. After the trust received the cash, CPA Susan resigned as trustee and Bill assumed that role.
This "near zero" tax plan for sale of the business provided Bill and Clara with 99% of the typical unitrust benefits. There still was a bypass of capital gain and a charitable income tax deduction, plus the favorable tax benefits of an operating unitrust.
Bill and Clara were very pleased. They now had over $2 million in their unitrust and headed south in their motorhome in search of new adventures.
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