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

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

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

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

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?