Preferred Stock Freeze Family Corp Common Stock Cumulative

Preferred Stock Freeze Family Corp Common Stock Cumulative Preferred Parent Gift Common Stock Children Ø No hope with S corp - One Class of Stock Requirement Ø Double tax hit on preferred dividend Ø Real Killer - preferred value under 2701 based sole on market value of cumulative yield. All other value in common under 2701 Ø Hence, strategy only works with extreme annual growth rate Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning. com

Unrelated Party Common Stock Sale Family Corp $ 3 Mill Common $ 2 Mill Non-cum Preferred Parent Common Stock Unrelated Party $ 3 Mill Cash, Notes Parent Income Tax = $ 3 mill less common stock basis Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning. com 6 -21

Preferred Stock 2701 Trap Family Corp $ 3 Mill Common $ 2 Mill Non-cum Preferred Parent Common Stock Related Party $ 3 Mill Cash, Notes Parent Income Tax = $ 3 mill less common stock basis Plus Taxable Gift of $2 million. Plus - Parent still owns preferred Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning. com 6 -21

Grantor Retained Annuity Trust ØFixed Annuity Amount ØFixed Annuity Term Remainder Property Annuity Term of Years ØAnnuity Paid Annually ØNo Debt, Etc. ØNo additions or others Children Parent & Estate ØMortality Risk of Deal ØYield Risk of Deal ØA “Darling” Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning. com

GRAT Something For Nothing Example Trust Ø 7529 Rate 5. 4% ØZero Remainder Value Remainder Property $ 1. 44 Mill Annuity $ 336, 291 yr. Term - 5 Yr ØAnnuity Funded Heavily From Principal Ø 5 Yr Mortality Risk Children Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning. com Parent & Estate ØAny Remainder Pass Transfer Tax Free

The GRAT & Family Stock Factors • Will work with S or C stock - just make grantor trust • Best to Use Nonvoting Stock • Negative impacts of corp earnings distributions • Yield risk at odds with other value strategies? • Opportunity cost of gift tax exclusions & credits • Gift tax payments with mortality risks - hard sell Zero Out Play • Fund annuity with stock transfers back? • Valuation boomerangs & costs • Impacts on health of business • Big costs and risks v. how much real benefit • Screwy message to inside kids Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning. com

3 YEAR GRIT Ø Term value zero Trust Ø Remainder Value 100% Ø Parent pays gift taxes Remainder Property All trust income Term - 3 Yr Ø Gift taxes in parent estate if death within 3 yr Ø Parent death within 3 yr term triggers basis step-up Children Parent ØTrade-off is appreciation included in estate Ø Nullity if parent survives 3 yr term Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning. com

Intentional Defective Grantor Trust Installment Sale “IDGT” Family Corporation Children Dream Scenario ØNo gain on sale ØNo gift tax impacts ØStock outside parent’s Beneficiaries Stock ownership ØTrust income taxed to parent Stock Installment Note Parent Other asset Gift estate Grantor Trust ØNo mortality risk ØAsset substitution preØ death for basis step-up ØWorks with C and S stock Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning. com

IDGT Issues What we think we know: • Dual status possible • No gain on sale to grantor trust • No gift tax on income tax payments by parent • No estate inclusion under 2036 if parent outlive note What we are not sure of: • • • Gift tax impact going in if interest rate is applicable federal rate Estate inclusion under 2036 if death before note paid Debt v. retained equity on note – need for other assets equal to 10% What we don’t know • • • Tax treatment on note payments post death – IRD? Gain recognition on note on grantor trust status termination Basis impacts on death with grantor trust termination Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning. com

IDGT & Family Stock Key questions: • Is cross purchase strategy best option? • Parent’s capacity to gift other assets? • Has stock basis been stepped-up at first death? • Impact on business? • Client’s stomach for tax uncertainty? Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning. com

Family LP Disappearing Act GP Units Limited Partnership S Corp Assets Distributions Assets LP Units Distributions Parents Gift of Assets Stock Distributions Children Bottom Line Goal: Valuation Discounts in Parent’s Estate Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning. com