Case:

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 a company that produced 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.

Question:

Four years ago, George funded a unitrust with the Green Converter stock which the trustee then sold all of Green Converter's assets to General Auto. George is now 79 years old and has been approached by Major Power Company, which would like to buy Green Probe (GP). George called his CPA and asked, "What should I do now? I still feel like I am paying a lot of tax. Can I sell tax-free again?"

Solution:

His CPA reviewed the situation and shared some good news. The existing unitrust permits additions, so George can add GP's shares directly to the existing trust. The income to George and Helen will reflect the added value. Since Major Power wants to buy the GP stock, this will be a much simpler transaction. George and Helen need to decide how much stock to transfer tax-free to the trust and how much to retain to sell outright. With this transaction, the GP stock given to the trust is sold tax-free and the unitrust deduction can offset the tax on the part retained by George and Helen which is sold for cash outside of the unitrust.

His CPA did a "zero tax" unitrust and sale calculation for George. With the total offer of around $5,000,000, his CPA suggested adding $3,000,000 in stock to the unitrust. The trustee would sell that stock tax-free and the charitable deduction of approximately $1,500,000 will offset the tax on the remaining $2,000,000 sold outright. George's CPA carefully explained that the deduction will be limited to 30% of their adjusted gross income and may be used over the next two or three years, while the remaining tax on the sale will be payable this year. In effect, there will be some tax paid this year on the sale, but the tax savings from the carry-forward deduction will offset that amount by year three.

"So, in effect I have a tax-free sale in three years," said George.

"Yes," noted his CPA. "And that still leaves you with the full $2,000,000 cash after the three years."

George transferred $3,000,000 in GP stock to the unitrust trustee and the trustee negotiated over the next four weeks before accepting the Major Power offer. He and Helen are delighted with their unitrust, now worth a total of $8,000,000, and with the $2,000,000 cash they had in the bank George and Helen went on an around-the-world trip to celebrate. As they were watching the sunset one evening, Helen asked, "George, we have sold Green Converter and Green Probe, but what shall we do with Green Scrubber?"