Diversify Your Concentrated Holding with a Charitable Trust

Snowy pedestrian walkwayBob C carefully nurtured his business for 30 years as it grew substantially in value to more than $20,000,000. His two children have chosen different career paths and are not interested in joining the firm. While he has capable employees who have been with him a long time, none of them has the kind of financial capacity to finance the purchase of the business from him.

However, over the past few years Bob has been approached by a number of much larger companies that have expressed interest in providing him with an exit strategy. After much discussion and soul-searching with his advisors and key employees, he approaches XYZ, Inc., a publicly traded company that he believes provides the best fit for the culture of his company.

The transaction is stock for stock because that achieves the best tax results for Bob (i.e., no capital gain is recognized on the transaction; it is deferred until a future sale occurs). However, this presents Bob with a quandary: Despite his faith in XYZ, he is nervous about having all of his eggs in one basket. Of course, the solution to that is to diversify by selling an appropriate portion of his XYZ stock to provide a balance in his portfolio. However, any sale of XYZ stock will be attended by capital-gain tax on the appreciation, and his basis in XYZ is zero just as it was in his own company.

After conferring with their lawyer and a member of our gift-planning team, Bob and his wife agree to establish a $2,000,000 charitable remainder unitrust that will pay them, 72 and 70 years old respectively, 5% of the unitrust’s value as it is revalued each year for the rest of their lives. They will also be allowed a substantial charitable deduction of almost $850,000 that will save them more than $297,000 in income tax.

The trust will be professionally managed, and its first step will be to sell the XYZ stock and purchase a diversified portfolio. This sale will not trigger capital-gain tax because the trust is tax-exempt.

The trust will pay them $100,000 the first year, and this payment will probably be taxed to them as capital gain. Thereafter, the payments will vary and will depend on the investment performance of the trust.

Diversifying a portfolio can be achieved at different levels with the thoughtful use of a charitable trust. Please contact us if we can be of any help.

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