Mike owns 100% of the stock in a closely held corporation worth $4 million. Over the years, the corporation has accumulated retained earnings in excess of $1 million. Michael’s objective is to reduce accumulated earnings in a manner that doesn’t create taxable income to himself. He has consulted his advisor who has suggested that he contribute $500,000 of closely held stock to a Charitable Remainder Trust.
These are observations of Mike’s situation:
- He is concerned about excessive accumulated earnings and doesn’t want to pay tax on distribution of accumulated earnings to himself.
- He wants to receive a tax deduction to lower his current tax
- He wants to endow the hospital that assisted his youngest child.
- He wants to increase his future retirement endowment
The Results of his $500,000 contribution of closely held stock:
- Mike will receive more future income he can rely on because the trust is designed to endow him with 7% of the trust value beginning when Mike turns 65.
- The future endowment income will be greater due to tax free growth inside the Charitable Remainder Trust
- Mike will pay less taxes because he will have a tax deduction in the year of the gift.
- Mike will avoid taxation on the distribution of the retained earnings.
- At Mike’s death, he will have endowed the hospital when they receive the balance in the trust.
