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Wednesday, May 1, 2024
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Case Studies |
Swenson "Early" Retirement, Part 4
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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 plan will work for Bill and Clara? They have a substantial IRA and also have certificates of deposit. But Bill would like to sell out 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. But as Bill says, "We started with nothing, and we want to give them some help. But they should also have the American advantage of being able to say they are 'self-made' persons."
Bill and Clara have supported their favorite charity for many years. They are willing to help charity, but would like a secure income. Bill notes, "We have survived business ups and downs for forty years, but now we just want to retire with a secure income. When asked if he 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 and receive a secure income? Could favorite charity take the business and give Bill and Clara a gift annuity?
Solution:
Bill and Clara have heard about gift annuities. With their IRA income and the payout from a gift annuity, they would be set for life. So both have their hearts set on a gift annuity.
But favorite charity faces two problems. First, a charity is exempt from tax if it is not running a business. So how could Bill and Clara transfer their business to the charity without problems? Would the charity have unrelated business taxable income by running the dealership?
First, there is a $1,000 exemption for UBI for a charity. If the dealership were transferred for a gift annuity and then immediately sold to new buyer, the UBI could be under the $1,000 exemption.
But there is another solution - a lease to key employees. Bill and Clara created a three month lease with two key employee who leased the entire business. They then gave the business in exchange for a gift annuity. The lease paid favorite charity a fixed amount each month that was calculated based upon last year's profits. Any extra profit above the fixed lease payments went to the two employees.
Since fixed lease payments are permitted under UBI rules, once the lease was in place, Bill and Clara could transfer the entire business to the charity (still subject to the lease). The charity would not have any UBI, since fixed lease payments for real property and intangibles are an exception to the UBI rules.
But there is a second problem. What if the charity cannot sell the business? And what will be the costs of sale? In order to reduce the risks to the charity, Bill and Clara waited until the charity had a buyer "waiting in the wings." In addition, the business was transferred to their favorite charity with 20% of the value as an outright gift and 80% given for the gift annuity. Since the charity was able to sell quickly to the new buyer, it received both a current gift and will benefit from the gift annuity payment stream. The outright gift portion protects their favorite charity.
The bottom line - Bill and Clara receive a fixed annuity for their two lives, their favorite charity has a future gift from the gift annuity and a major current gift.
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