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CRT Case Study: Bill Webster, nearing retirement as CEO of IC Corp., had family working in his growing business. As a primary goal, he wanted to shift his 60% stock ownership to the kids without creating significant income tax or gift tax burdens. Like many hi-tech industries, IC Corporation started on a “shoestring” as a supplier of resins for integrated computer chips. The corporation had significant retained earnings, since profits were consistently plowed back into the rapidly growing business. The firm’s accountant cautioned Bill about the IRS penalty on this surplus and advised him to declare dividends. Mr. Webster resisted that suggestion because of the double taxation penalty. On the other hand, he was unwilling to sell his low basis stock and pay the capital gains tax. Why? The stock sale option would have reduced by nearly a third the $1 million in sale proceeds, and limited his opportunity to reinvest for a comfortable retirement. (see chart below)

A powerful solution existed by creating an IRC Section 664 Trust and transferring Mr. Webster’s stock to this trust. The highly appreciated stock was then redeemed from the trust at fair market value by the corporation and retired. The heirs received control of the business, as their minority ownership was converted to a majority interest when his stock was retired as treasury stock. Additionally, the accumulated earnings penalty was avoided, since the problem surplus was reduced by the company’s stock redemption. Mr. Webster simultaneously established an account funding his retirement without paying any capital gains tax on the transfer of this highly appreciated asset. An additional advantage of this trust scenario allowed his funds to continue growing in a tax-deferred environment and further compound in value. Although this briefly summarized technique required highly competent financial, legal and tax advisors, it offered a closely-held business owner an excellent opportunity to free up otherwise locked in value. IRS control was eliminated, Mr. Webster enhanced his income and the business went to family members in a tax advantaged fashion.

ãVaughn W. Henry, Henry & Assoc. 1996

Springfield, Illinois 62703-5314 [home

Email[email protected]

 Corporate Stock Redemption via CRT


Option A

Keep Asset

Option B

Sell Asset

Option C

664 Trust

Sale of Stock With Zero Basis $1,000,000
Capital Gains (Federal & State) at 31% – 310,000
Amount Invested/Reinvested $1,000,000 $ 690,000 $1,000,000
Income Produced Now at 3% $ 30,000
Income In New Investment at 9% $ 62,900
7% Payout from Trust Earning 9% $ 90,652 *
After-Tax (Combined at 40%) Cash Flow $ 18,000 $ 37,260 $ 54,391
Additional Joint Life Expectancy for 65/64 Yr. Old Married Couple 26 Years 26 Years 26 Years
Total Lifetime Income & Tax Savings $ 468,000 $ 968,760 $1,518,026
Total Increase /Retirement Cash Flow $ 500,760 $1,050,026

The illustrated IRC § 664 Trust calculations were based on the income beneficiaries’ ages of 65 and 64. The current asset, a closely-held “C” corporation, previously produced a return of 3% of market value. IRC Section 7520 rate (7.6%) was used and when assets were sold and repositioned for increased income potential, the new comparable risk portfolios were assumed to earn 9% on their pre-tax yields. As a component of an integrated estate plan, this trust offers business owners and their heirs the opportunity to redirect their “Social Capital” and keep control of assets that otherwise would default to the IRS.

* Average annual payout over projected joint lives of income recipients.

Vaughn W. Henry – Gift & Estate Planning Services. As a professional courtesy, we provide hypothetical CRT evaluations for advisors. See form format.