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Alice and her younger sister Susan started a small-town produce stand nearly 50 years ago. At the time, they did not think much about corporate form, as they were young and eager to get their business idea started. Their small produce stand has grown into a mid-sized, locally-sourced grocery store in their town, with a committed customer base. Alice is now ready to retire and wants to sell her partnership interest. When she meets with her advisor, he tells her that selling her partnership interest will result in a hefty tax bill. The partnership interest is a capital asset and is appraised at $500,000. With a federal capital gains tax of 23.8%, Alice could end up with a $119,000 capital gains tax bill. Alice's state capital gains tax is 8%, resulting in an additional $40,000 in state taxes.
Her advisor suggests that she consider selling an undivided percentage of the partnership interest to a third party and make a charitable gift of the remaining portion of her partnership interest so that she can take an income tax deduction. The advisor cautions Alice, however, that there are two factors that may mitigate the benefit she will receive. First, she will not be allowed a charitable income tax deduction for the entire value of the gifted interest, since the store's inventory and unrealized receivables will be considered "hot assets." Second, because she is donating a portion of her partnership interest, the value of her deduction is going to be further diminished by a discount applied by the appraiser.
Carlos and Jose started making custom tee shirts for their friends as a side job in college. As they approached graduation, they realized they had a strong business model and decided to open up a shop in town. Now, 10 years later, Carlos is ready to move on to other ventures. After consulting with his attorney and accountant, he negotiates a bargain sale of his $250,000 interest to a charity that plans to quickly resell the partnership interest to Nolan, Jose's brother-in-law. Carlos receives $175,000 in cash from the charity, which represents nearly three-quarters of the value of his partnership interest, as well as a $75,000 charitable income tax deduction. Carlos must allocate 70% of his basis in the partnership to the sale portion. Through this gift, he is able to save taxes with a bypass of a portion of his capital gain along with a charitable income tax deduction.
Aaron and Bryan own a successful car wash in the Southwest. They never incorporated, instead operating for decades as a partnership. Bryan is now looking to retire and sell his ownership interest in the car wash. He is, however, concerned over the hefty capital gains tax bill he will have to pay if he sells his interest outright. He meets with his attorney, Bob, to discuss the possibility of donating his interest to a charitable remainder trust for the benefit of a local university foundation. Bob advises Bryan that the trustee would only be willing to accept the gift if there is a buyer waiting in the wings. Bryan has informal discussions with Vince, who indicates that he would like to get into the car wash business, but they do not sign a sales contract.
Bryan and Aaron close the car wash for repairs over a holiday weekend. During this time, Bryan places his ownership interest in a CRT. On the following Monday, Vince purchases the partnership interest from the CRT. Because the car wash was closed during the entire time the CRT held the partnership interest, there is probably no UBI for the CRT and thus no excise tax due.
Heather and her sister Maria own a small shop selling novelty items. The sisters organized the shop as an LLC 15 years ago. Although the shop has enjoyed great success, they are now ready to move on to other ventures. Heather decides to meet with her advisor, John, to come up with a creative and cost effective way to sell the business and also generate a future stream of income. John recommends that Heather and Maria lease the shop's assets to their valued employee, Michael, and then transfer their LLC membership interests into separate CRTs. Michael is willing and eager to take on the lease of the LLC assets over the short term. Heather and Maria are able to successfully transfer their LLC interests to their own CRTs, generating income for their lives and also avoiding the 100% excise tax on the shop's income. The CRTs then sell the LLC interest to a new buyer.
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