Planned Giving

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Saturday April 20, 2019

Case of the Week

George's "Green Children" Unitrust III

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 was determined to become a successful business owner. After high school, he obtained 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 spent every spare moment studying. His work ethic was quickly recognized by faculty. After graduating with honors, he became a graduate assistant and earned a master's degree in engineering.

George had always loved nature. He interviewed with and became a product development engineer for 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 that offered environmental consulting. As soon as he could gather and borrow the funds, he also started to produce components for emissions control equipment. After a terrific struggle, 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! Then, they all 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 a company named Green Converters (GC). Finally, George started a third company to build "smokestack scrubbers" that would clean the emissions from the smoke of power plants. Later, there was a huge increase in the cost of energy and power companies began to build more coal-burning plants. His "smokestack scrubbers" from Green Scrubber were in great demand.

Question:

Seven years ago, George funded a unitrust with the GC stock and then GC sold all assets to General Auto. Three years earlier, George sold Green Probe to Major Power Company. At age 82, George and Helen now know they need to sell Green Scrubber (GS). Fortunately, MegaScrubber is very interested in purchasing GS. So George called their CPA, Arnie Arnst, and asked, "What should I do now? We don't want to pay a large tax. The unitrust worked fine before and I suppose that we could sell tax-free again. But the trust's value is over $9,000,000, and we do not need for more income. We are swimming in a sea of cash. What should we do?"

Solution:

Arnie reviewed the situation and offered a suggestion. While the existing unitrust permits additions and the GS stock could be added to the trust, he had another idea. George and Helen wanted to benefit their children Bill and Susan with an inheritance, but they did not want to give a large gift of principal. Susan and Bill are in their early 50's. Arnie suggested that George and Helen decide on an inheritance target for both Bill and Susan. Part would be given during life and part would be distributed from George and Helen's estate. The lifetime gift would be a stream of income from a term of years unitrust funded with the GS stock.

George and Helen liked the concept. They could give their GS stock to a new unitrust for Bill and Susan and receive a large tax deduction. MegaScrubber was willing to pay about $3,000,000 for the stock. Therefore, they funded a 5% unitrust paying Bill and Susan for a term of 20 years with the GS stock and received a charitable deduction of more than $1,000,000. Trustee Arnie waited four weeks and then sold the stock to MegaScrubber.

Each year the unitrust will pay about $75,000 to Bill and $75,000 to Susan. While there is a taxable gift of the value of the income to Bill and Susan, George and Helen retained a testamentary power of revocation.

The gift tax return is due on this transfer next April 15. George and Helen can use their annual exclusions first and then part of their lifetime gift exemptions to cover the balance of the gift. Arnie will file the gift tax returns by April 15 each year.

George and Helen are very pleased with this plan. They will use the $1,000,000 charitable deduction over six years and now have sold all three businesses with no net tax. Bill and Susan will receive a large inheritance over the next 20 years from the unitrust and will someday receive an additional inheritance from the estates of George and Helen. Best of all, the unitrust will endow George and Helen's favorite charity with more than $8,000,000 when George and Helen pass away. George thought, "We have come a long way from the farm in Bulgaria. Life is good!"

Published January 4, 2019
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George's "Green" Sale and Unitrust II

George's "Green" Unitrust I

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Wild Bill Russell's "Artistic" Unitrust

Wild Bill Russell's Art Gift

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