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Twenty-nine years ago, Tommy started a family business manufacturing baseball bats. The company has come a long way from its humble beginnings. The company is now one of the industry leaders, selling bats to little leagues across the country and to up-and-comers in the minor leagues as well as some of the biggest names in the major leagues. Despite its success, the company has never gone public. Instead, Tommy chose to keep his company as a closely held C-corp so he could focus on making quality products rather than having to answer to investors. Tommy is now considering his retirement options. He is ready to liquidate his stock, but has two major concerns. First, the value of his stake in the company has appreciated astronomically compared to his cost basis. Second, he wants to leave the company to his two sons, Kirk and Justin, who are minority shareholders, but he understands they do not have the liquidity to buy him out.
Tommy meets with his attorney for advice on the most efficient way to leave the business in good hands. His attorney explains that he might want to consider donating a portion of his shares to his favorite charity and selling the remainder of his shares to the corporation itself. The attorney goes on to explain that once the donation and sale have both closed, it is likely that the corporation will be able to purchase the charity's shares. Tommy gives a portion of his shares to charity and sells his remaining shares to the corporation. Within a few months after the charitable gift is complete, the charity and corporation negotiate a corporate redemption. Tommy is satisfied because his income tax deduction offset a significant amount of the gain on the sale of his stock. Kirk and Justin are satisfied because they are able to remain in control of the family business.
Ernie has spent most of his adult life operating his eponymous, family-owned pizza parlor. Established as a closely held C-corp, it didn't take long for Ernie's Pizza to go from serving the best deep dish on the north side of town to having locations across the state. Ernie is now advancing in age and is ready to hand off the business to his sons, Joe, Tony and Kris.
When he meets with his attorney to discuss his possibilities, Ernie mentions that, while he is ready to back away from the business, he is concerned that he will not have a steady stream of income. Ernie's attorney lays out a plan whereby Ernie can establish a charitable remainder unitrust to benefit a local charity. With this plan, Ernie is able to take a charitable income tax deduction, bypass capital gains and also receive unitrust income for the remainder of his life. Following the establishment of the trust, Ernie gives 10,000 shares to the unitrust. After four weeks, Ernie's Pizza offers a stock redemption plan to all of its shareholders for the appraised value of the company. While Joe, Tony and Kris are content with their stake, the CRT is willing to liquidate the stock and reinvest the proceeds. Ernie's Pizza and the CRT readily agree to the corporate redemption for fair market value.
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