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

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

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

6. Grantor Retained Annuity Trust Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com Trust Annuity Term of Years Parent & Estate  Fixed Annuity Amount  Fixed Annuity Term  Annuity Paid Annually  No Debt, Etc.  No additions or others  Mortality Risk of Deal  Yield Risk of Deal  A “Darling” Children Property Remainder

7. GRAT Something For Nothing Example Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com Trust Annuity $ 336,291 yr. Term - 5 Yr Parent & Estate  7529 Rate 5.4%  Zero Remainder Value  Annuity Funded Heavily From Principal  5 Yr Mortality Risk  Any Remainder Pass Transfer Tax Free Children Property $ 1.44 Mill Remainder

8. Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 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

9. 3 YEAR GRIT Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com Trust All trust income Term - 3 Yr Parent  Term value zero  Remainder Value 100%  Parent pays gift taxes  Gift taxes in parent estate if death within 3 yr  Parent death within 3 yr term triggers basis step-up  Trade-off is appreciation included in estate  Nullity if parent survives 3 yr term Children Property Remainder

10. Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com Parent Family Corporation Grantor Trust Intentional Defective Grantor Trust Installment Sale “IDGT” Stock Installment Note Stock ownership Other asset Gift Children Beneficiaries Dream Scenario  No gain on sale  No gift tax impacts  Stock outside parent’s estate  Trust income taxed to parent  No mortality risk  Asset substitution pre-  death for basis step-up  Works with C and S stock

11. 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

12. 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?

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