Case of the Week

Case:

George Green was a man of humble beginnings. He was born in Bulgaria and lived with his parents on their farm. 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 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 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 (GP). 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, power companies began to build more coal-burning plants. The "smokestack scrubbers" from Green Scrubbers (GS) were in high demand.

Question:

Fourteen 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. Over the years, the unitrust has grown to over $10,000,000. At age 88, he and Helen now would like to fund a major building at their favorite charity. But they need to make a $2,000,000 gift for the "Green Center." How can they accomplish their goals? George called their CPA, Arnie Arnst, again and asked, "What should I do now? We would like to make a $2,000,000 gift, but the funds are in our unitrust. The unitrust is now over $10,000,000, and we do not need more income."

Solution:

Arnie reviewed the situation and offered a suggestion. George and Helen retained the right to select charities for the remainder of their unitrust. Since they do not need income from the full $10,000,000, Arnie suggested that they make a $2,000,000 gift from their unitrust to fund the Green Center. They could do so by irrevocably designating their favorite charity as the remainder recipient and as the income recipient of 20% of the trust. Under the trust doctrine of merger, their favorite charity then will own 20% of the unitrust and the trustee may distribute $2,000,000 outright to their favorite charity.

A smiling George and Helen watched their trustee hand the $2,000,000 check to the President of their favorite charity. An added bonus of this gift was another charitable tax deduction. Based upon the 5% trust payout and their ages, there was a deduction for the value of the income interest transferred to charity. This new deduction of over $600,000 will save about $200,000 in taxes over the next three years.

George and Helen are very pleased with this plan. They attended the dedication of the Green Center and were delighted with both the gift and their added charitable deduction.