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Tuesday December 12, 2017

Case of the Week

George's "Green" Unitrust I

Case:

George Green was a man of humble beginnings. He was born in Bulgaria and lived with his parents on their farm. But George was a diligent student and determined to become a successful business owner. After high school, he was able to get permission to come to America to go to college. George applied to several colleges and was accepted as a work-study student at a state college. He lived in the dorm and worked nights in the cafeteria. On weekends, he moonlighted as a waiter at a five star restaurant.

George was both resourceful and determined to succeed. He enrolled in chemical engineering and studied every spare moment. His industry was quickly recognized by faculty. After graduating with honors, he became a graduate assistant and also earned a master's degree in engineering.

Because of his early years on the farm, George always loved nature. He interviewed and became a product development engineer with a company that built emissions control equipment for automobiles. Soon, George met Helen Wilson and they married.

But George was too energetic to stay in one place. After saving $5,000, he convinced Helen that it was time for him to go out on his own. George started a company and initially did environmental consulting. As soon as he could gather and borrow the funds, he also started to produce components for emissions control equipment. After struggling initially, the business took off and George began to manufacture probes for company smokestacks. When asked if that was a good business, George responded, "It is a great business. Companies buy my probes to measure their smokestack emissions and then the government changes the rules! They all then have to buy upgraded probes!"

George incorporated the probe manufacturer as Green Probe. Ever the entrepreneur, he later had a chance to buy a company that built converters for automobiles. He bought the assets of that company and transferred them into Green Converters. Finally, George started a third company to build "smokestack scrubbers" that would clean the emissions from the smoke of power plants. Since there later was a huge increase in the cost of energy, power companies began to build more coal-burning plants and his "smokestack scrubbers" from Green Scrubber were in great demand.

Question:

George is now age 75 and finally thinking about slowing down. He owns three C Corporations – Green Probes, Green Converters and Green Scrubbers – and asks his CPA Arnie Arnst what he could do. "How do I phase back without paying a huge tax bill? I love America, and I support my country, but I HAVE supported my country!"

Solution:

Arnie indicated that a tax-free sale with a trust might be an excellent option. He also suggested that George should work with one corporation at a time. He asked, "Do you have any offers?" George replied, "General Auto has talked to me about buying Green Converters, but we have not yet agreed on price."

CPA Arnie responded that it is essential to create the trust before the sale in order to protect the tax benefits. Since George and Helen own 100% of the stock, they can control the timing of the sale. George and General Auto then began negotiations in earnest. General Auto decided that it would not buy the stock, but wanted an asset purchase so that there would be a new basis in the assets to depreciate. George tried to sell the Green Converter (GC) stock but they would not budge. They offered $4,000,000 for the assets of GC.

After conferring with Arnie, George decided that he would need to sell the assets. The GC basis in the assets was fairly high, since he had also bought the assets when he set up GC. He decided to accept the $4,000,000 offer, since the GC basis in the assets was $2,400,000. But he still could save major taxes by funding a unitrust with his stock in GC. Before accepting the offer, George and Helen transferred all GC stock to a 5% FLIP unitrust for two lives. Arnie served as initial trustee. The unitrust then controlled GC and sold all the assets to General Auto for $4,000,000. With a GC basis of $2,400,000, there was gain of $1,600,000 and federal and state tax of about $600,000. The unitrust then liquidated GC and invested the $3,400,000. With the charitable tax savings from the unitrust of over $300,000, the net tax cost to George was under $300,000. Without the unitrust, his personal and corporate tax would have been over $1,500,000, so he was very pleased with the charitable trust.

Published December 9, 2016

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