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Saturday September 30, 2023

Case of the Week

George's "UT to Green Gift Annuity" Conversion

Case:

George Green 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:

Eighteen years ago, George funded a unitrust with the Green Converter stock and then the trustee sold all of Green Converter's assets to General Auto. Several years later, George sold Green Probe to Major Power Company. Over the years, the unitrust has grown to over $10,000,000 and George and Helen are not in need of income from the trust. George and Helen have made a $2,000,000 gift from the unitrust to fund the "Green Center" at Favorite Charity but they want to make another larger gift to Favorite Charity.

Solution:

His CPA reviewed the situation and offered a suggestion. George and Helen have been saving most of their payouts and now have $3,000,000 in tax-free bonds plus their unitrust. The CPA suggested they convert the unitrust to a gift annuity. George and Helen like the fixed payouts of the gift annuity, so they decide to do the conversion.

Based on their ages, the remainder value of the unitrust is $6,347,160 and the income value is $2,652,840. George and Helen exchanged the $2,652,840 income value for an 8.6% gift annuity from Favorite Charity. The annuity pays $228,144 per year. George, who never misses a senior special, thinks that they will live on about one-third of this amount each year and use the rest to buy more tax-free bonds.

In addition to another charitable deduction of $1,298,754 for the gift annuity, they now will accelerate the remainder gift to Favorite Charity. The $6,347,160 value will be used to double the size of the Green Center and to fund an operations endowment to maintain the center. Both George and Helen are delighted with this excellent enhancement to their legacy. George exclaimed, "We have come a long way, and it has been a great trip!"

Published September 22, 2023
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