Wednesday December 8, 2021

Case of the Week

Southern Brat Unitrust and Sale Bailout

Case:

Peter and Sue Olson were raised in the great North Country. After college, they were married, and Peter accepted a position with one of the nation's largest discount stores. He rose through the ranks and finally was promoted to be manager of the New Orleans branch of the store.

Peter and Sue lived in a suburban area of New Orleans and he was quite successful at managing the store. Each weekend, Peter enjoyed his hobby of grilling bratwurst sausages on his barbeque. Peter recognized that brats were a well-known delicacy in the north, but were a relatively new phenomenon to his southern friends. So, Peter frequently invited friends and neighbors over for a brat and sweet iced tea gathering.

Peter and Sue were thinking about becoming entrepreneurs, so they started a small business, the "Southern Brat Deli." To their great surprise and mutual joy, their southern customers were delighted with brats and sweet tea. The Southern Brat Deli flourished and Peter soon opened another store – and then another and another, until there were ten Southern Brat Delis stretching across Louisiana and Mississippi.

On the advice of his CPA, Peter had incorporated Southern Brat Deli, Inc. as a C Corporation. He was able to operate efficiently and the Southern Brat Deli, Inc. grew and flourished under his leadership. Over time, the Southern Brat Deli, Inc. acquired various diverse assets and business interests, in addition to the ten locations of the Southern Brat Deli.

Peter and Sue are now 70 years old and a large restaurant company has offered to purchase Southern Brat Deli, Inc. Fortunately, Peter and Sue knew that they should not sign the purchase offer before speaking with their attorney. After meeting with their attorney Bill and discussing their retirement goals, they thought that placing 2/3 of the stock in a unitrust and selling 1/3 for cash would be a good choice. The 2/3 in the unitrust would bypass any immediate capital gain, while the tax on the 1/3 sold for cash would be offset by the charitable deduction from the unitrust.

Question:

Would this plan work? What if the sale falls through? Can Peter and Sue continue to run Southern Brat Deli, Inc? Is there a time limit?

Solution:

Peter and Sue want to fund a unitrust, but a sale could take six months, one year, five years or even longer. If they fund the unitrust and Bill includes the Sec. 4943 Excess Business Holdings rules provision in the unitrust document, then the trustee would need to sell within five years. However, their attorney discovered that the Sec. 664 Unitrust Regulations do not require the Sec. 4943 provisions in the document. Therefore, Bill drafted the unitrust without the excess business holdings provision. Peter and Sue transferred 2/3 of their stock to the unitrust, with their attorney as initial trustee. As it happened, the first sale did fall through. Fortunately, another buyer surfaced two years later and Southern Brat Deli, Inc was sold for a much higher price. Peter and Sue have a very substantial income, a large cash reserve, and purchased a replacement insurance policy to provide a generous inheritance for their children. Peter says, "Life could not be better than to travel and relax with a brat and sweet tea."

Published August 6, 2021

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