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Saturday July 20, 2024

Case of the Week

George's "Green" Unitrust I


George was a man of humble beginnings. George was both resourceful and determined to succeed. He enrolled in chemical engineering and studied diligently. His diligence was quickly recognized by the faculty. After graduating with honors, he became a graduate assistant and earned a master's degree in engineering. He interviewed and became a product development engineer with a company that built emissions control equipment for automobiles. Soon, George met Helen and they married.

George started a company and initially did environmental consulting. As soon as he could gather and borrow the funds, he 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. When the government regulations change, they have to upgrade and buy my newer probes!"

George incorporated the probe manufacturer as Green Probe. Enjoying being an entrepreneur, he contemplated the opportunity to purchase a company that built converters for automobiles. He bought the assets of that company and transferred them into a new business, Green Converter. Finally, George started a third company to build "smokestack scrubbers" that would clean the emissions from the smoke of power plants. Since there was a huge increase in the cost of energy, power companies began to build more plants and his "smokestack scrubbers" from Green Scrubber were in great demand.


George is now 75 years old and finally thinking about slowing down. He owns three C Corporations – Green Probe, Green Converter and Green Scrubber – and asks his CPA what his options are. "How do I phase back without paying a huge tax bill? I love and support my country, but I HAVE supported my country for some time and would like to avoid a large tax bill!"


His CPA indicated that a tax-free sale with a charitable remainder unitrust might be an excellent option. He also suggested that George should work with one corporation at a time. He asked George if he had any offers and George replied, "General Auto has talked to me about buying Green Converter, but we have not yet agreed on a price."

His CPA responded that it is essential to create the unitrust before the sale in order to protect the tax benefits. Since George and his wife Helen own 100% of the stock, they can control the timing of the sale but must be careful of a prearranged sale. After the unitrust is created, the trustee of the unitrust and General Auto can then begin negotiations in earnest.

George wanted to save major taxes by funding a unitrust with his stock in Green Converter. Before negotiating, George and Helen transferred all Green Converter stock to a 5% FLIP unitrust for two lives. His CPA served as the initial trustee. General Auto indicated that it would not buy the stock. Instead, it wanted to purchase assets so that there would be a new basis in the assets to depreciate. General Auto eventually offered $4,000,000 for the assets of Green Converter. After conferring with his CPA, George decided that it would be best to sell the assets. The basis in Green Converter's assets was fairly high, since George had bought the assets when he set up Green Converter. He determined that it would be a good idea to accept the $4,000,000 offer, since the basis in the assets was $2,400,000.

The unitrust then sold Green Converter's assets to General Auto for $4,000,000. With a basis of $2,400,000, there was gain of $1,600,000 and federal and state tax of about $480,000. Because this was an asset sale, rather than a sale of corporate stock, there was gain recognized at the corporate level. The unitrust liquidated Green Converter and invested the $3,520,000. With the charitable tax savings from the unitrust of more than $300,000, the net tax cost to George was under $200,000. Without the unitrust, his personal and corporate tax would have been more than $1,500,000, so he was very pleased with the charitable trust.

Published August 25, 2023
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