|
Sunday, May 5, 2024
 |
Case Studies |
Zero Tax Greenco Bailout, Part 1
|
Case:
Bill and Clara Green consider themselves very fortunate. Bill was born in Estonia. When 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 is now 70 and Clara is 68. He would like to sell and has an offer from MegaCorp. But he would like both cash and a tax-free sale. When the gift planner asks Bill how soon he plans to sell, Bill's reply is, "Well, I plan to sell at the meeting tomorrow at 2:00 pm."
Question:
How can Bill and Clara sell Greenco? Is it too late? Can they still benefit from income tax savings and sell tax-free?
Solution:
After further discussion, Bill explained that he was actually signing a "letter of intent" to sell. The next morning, Bill and Clara met with their attorney. They reviewed the options and decided to transfer 70% of their stock into a two-life 5% charitable remainder unitrust. Since the time was short, the attorney drafted the unitrust with their CPA as trustee. Bill and Clara retained the right to change trustees and the right to change charities. They and the CPA signed the trust document, and Bill and Clara transferred the 70% of their shares into the unitrust at 1:00 pm. When they met with the prospective buyer at 2:00 pm, they signed a letter of intent to sell. Since the letter of intent was not legally binding, their attorney indicated that they would still qualify for the bypass of capital gains on the unitrust.
As sometimes happens, the first sale fell through. Fortunately, their attorney had selected a FLIP unitrust. The unitrust was a net income with makeup trust until they sold the stock. After the sale, on the next January 1 the unitrust would change to a standard unitrust paying out 5% each year.
After several months of negotiations, they came to an agreement with a new buyer at a much higher price. There was a joint sale of the stock, Bill and Clara sold their 30% and the CPA sold the remaining 70% as trustee of the unitrust. Finally, Bill and Clara had cash and a tax-free sale. The charitable deduction on the unitrust produced sufficient tax savings to offset the gain on the 30% sold for cash. Bill and Clara were delighted.
But what about their children, Susan and Harry? Bill and Clara decided to use part of their new income from the trust to fund an irrevocable insurance trust. The insurance trust will provide an excellent inheritance for both children. Best of all, it is income- and estate-tax free.
Bill and Clara celebrated with a cruise to Hawaii. They were recently seen sailing off into the sunset while reclining in two deck chairs.
|
|
|
|
