Family Investment C Corporation 1 EFTA00585216

Table of Contents • Objectives • Family Investment-C Corporation • • Creation of Family Investment-C Corporation • Interaction between Family Partnership and Family Investment-C Corporation • Income Statement of Family Investment-C Corporation • Family Limited Partnership (FLP) • Family Partnership Key Terms • Formation of the Family Limited Partnership • Income Statement of Family Limited Partnership • Benefits of Family Partnership • Disadvantages of a Family Limited Partnership ' This was presented using a C Corp as the structure nerve center, but is also amicable to the LLC nerve center model WTAS 2 EFTA00585217

Objectives • Provide long-term asset management • Maximize income tax deductions for fees paid in regards to investment management & advisory lees, income tax preparation fees, and other deductible expenses • Provide vehicle for estate planning First capital c Two-tier app ains tax rate cut since 1981. WTAS • 28% top rate on net long-term capital gains reduced to 20% (15% rate reduced to 10%) -- effective for gains after 5/6/97. -- from 5/7/97 -7/28197. applies to assets held more than 12 months. -- effective 7/29/97. applies to assets held more than 18 months. (Note: Assets held more than 12 months but not more than 18 months still qualify for 28% top rate.) 20% top rate reduced to 18% (10% rate reduced to 8%) for assets held more than 5 years -- effective in 2001. -- 18% rate applies to assets acquired after 2000. -- mark-to-market election for assets held on 1/1101 so as to restart the holding period. -- gains recognized, but not losses. -- for 10% rate, no requirement assets be acquired after 2000. For tax years including 5/7/97, lower rates apply to net capital gain taken into account after 5/6/97. -- Impact: Installment sale payments received after 5/6/97 get lower rate. Other issues: • for pass-through entitles (partnership. S corporation or RIC). character of gain (pre-May or not) based on when entity received capital gains • same reduced rates apply for alternative minimum tax (AMT) purposes • 20% rate applies to most capital assets, except, -- collectibles (fine art. jewelry). -- certain real property gains. and -- qualified small business stock (see next slides). Planning: • modify portfolio holdings to emphasize growth taxable at capital gains rates rather than income that is taxed at top rates for ordinary income. • execute stock sales before ex-dividend date to capture at capital gains rates, appreciation element due to corporate earnings. 3 EFTA00585218

seek stock options, especially incentive stock options, from employers to convert compensation income to capital gains. • take early payments of deferred compensation and distributions from qualified retirement plans and invest after-tax funds to take advantage of low capital gains rate. Comments: Taxpayers with incentive stock options need to be careful to avoid an AMT trap. The bargain element is taxable under the AMT upon exercise of the option. While the stock could receive the 20% capital gains rate for regular tax purposes when sold, it may be difficult to use the full AMT credit generated in the year if the ISO was exercised. Result: Higher effective tax rate than 20%. 3 EFTA00585219

Family Investment (C Corporation) EN WTAS Use the example shown when a section divider is required within a presentation. Acting like a "chapter heading," section dividers work best when they use a small number of words and a large type size. You can paste this section divider sample slide directly from this portfolio and overwrite it as necessary. 4 EFTA00585220

Creation of Family Investment — C Corporation • Current Hurdles • The ability to deduct Investment management & advisory fees, Income tax preparation fees. and other deductible expenses on the Individual Income Tax return is problematic because of the following: • Alternative Minimum Tax: Investment management & advisory fees. income tax preparation fees and other deductible expenses are not deductible for the Alternative Minimum Tax computation • 2% Limitation under Other Miscellaneous Deductions: Investment management & advisory fees. income tax preparation fees, and other deductible expenses are deductible only to the extent that they exceed 2% of adjusted gross income • 3% of Adjusted Gross Income Limitation: Assuming the investment management & advisory fees, income tax preparation fees, and other deductible expenses dear the first two hurdles, they are additionally reduced by 3% of adjusted gross income with modifications along with all other itemized deductions The interplay of these three factors frequently cause the investment management & advisory fees, income tax preparation fees, and other deductible expenses to be non-deductible. > I WTAS 5 EFTA00585221

Creation of Family Investment — C Corporation • Potential Solution • Form an Investment Management Corporation (a C Corporation) which serves as a family office to handle investment management for the family (and possibly others). • The newly formed C Corporation would contract with the third party service providers and pay the investment management & advisory fees, income tax preparation fees, and other deductible expenses. • The newly formed C Corporation would serve as a general partner in a newly formed New Partnership where it contributes a small amount of capital (typically 0.2% - 1%) and gets a profits allocation which is disproportionate to its capital. • The Family Investment-C Corporation would be able to net the investment income against its investment management & advisory fees. income tax preparation fees, and other deductible expenses. WTAS 6 EFTA00585222

Creation of Family Investment — C Corporation Creation of Family C Corporation t Client Family Investments (Fl) C Corporation Assets Liabilities Sl.000,000 SO I ts Spouse 13041011 91% Client and Spouse will contribute a nominal amount to create a C Corporation. Family Investments. Family Investments will manage Client and Spouse's investments and pay professional fees in relation to the production of income. The contnbubon of assets will qualify as a tax free exchange under Section 351. The contribution into Family Investments is dependent upon the anticipated expenses of the family office and the contributions that Family Investments will need to make into the Family Partnership or LLC's estabkshed. > I WTAS 7 EFTA00585223

Creation of New Partnership Family Investments will contribute cash between 0.2% to 1% into New Partnership and have General Partnership units in exchange. The eiclivklual will contribute their already diversified portfolio alto New Partnership and take back Invited partnership units. Note a LLC as well as multiple partnerships can be utilized withal the structure. > I WTAS 8 EFTA00585224

Interaction Between New Partnership and Family Investments Family 'met:flu:mi. Form K.1 !maw S • INvadault ≤ r .i i i Capita/ Cairn total Income S LIIJI1.111111 In exchange for handling the investment management for the New Partnership. Family Investments will receive a management fee of 10 basis points along with a profit interest of 20% on the first S5 million of income generated by the Partnership. The profits interest would then cascade ri a waterfall scenario to lower percentages based on ',creased profits of the partnership. Family Investments will receive a K-1 for its profits interest as well as its management fee. •• ear 1 WTAS 9 EFTA00585225

Income Statement of Family Investments - C Corporation rK. Family linaemene C Cc:90mm I Income $1.040.000 Expense% ILIA= Net Lem ($60.000) ....„....y In the optimal scenario. the profits override on the partnership interest enables the Famty Investments to cover legitimate bealreeS expenses. It is anticipated that in the first year Fan* Investments will generate an NOL which wi be carried lorward to hAure years. The Family Investments tw1 be reimbtosed by Client and Spouse for any personal expenses. WTAS 10 EFTA00585226

New Partnership EN WTAS Use the example shown when a section divider is required within a presentation. Acting like a "chapter heading," section dividers work best when they use a small number of words and a large type size. You can paste this section divider sample slide directly from this portfolio and overwrite it as necessary. 11 EFTA00585227

New Partnership Key Terms • Dissolution Date - December 31, 2103 Only General Partners can Terminate the Partnership Early • Limited Partners Have No Right to Withdraw • Limited Partners Cannot Participate in Management • Partnership Shall Continue Upon Death of a General Partner if There is One or More Surviving General Partners. • Limited Partners May Transfer Their Interest Subject to a Right of First Refusal. > WTAS 12 EFTA00585228

Formation of the New Partnership t Client Spouse Latina t Family Investments IMO.. Unto Zi% ['Kea Oornele 1,000 Unit% 500,000 earth and &twines 50 000 000 99 000 Units 49500 000 c AA= Umb SSW= Client Spouse. and the Family Investments create a family limited partnership for which they receive the retests detailed above. > WTAS 13 EFTA00585229

Income Statement of New Partnership Family Limited Pannerthip Income Interest S 3.250,000 Dividends S 750,000 Capital Gains SIAM= Total Income 55,000.000 WTAS 14 EFTA00585230

Benefits of Family Partnership Non-Tax Benefits of Family Partnerstlill • Consolidates Family Investments • Reduce Management Fees Through Economies of Scale • Increases Diversification • Promotes Family Interaction • Parents Retain Control During Life • Centralized Management • Children receive an Illiquid Asset Limited Asset Protection • Creditors • Divorce > WTAS 15 EFTA00585231

Benefits of Family Partnership (continued) InsnaTaxikaudlizadiamnannanthin • Provides Investment Vehicle for Smith Family C Corporation to Generate a Profits Interest • No Double Taxation of Income • Future appreciation passes tax free Additional Estate Tax Benefits of Family Partnership • Future Appreciation Passes Tax-Free • Discounts Pass Existing Value Tax-Free • Leverage Available to Maximize Freeze • No Ownership Restslctions- Compare S Corporation > WTAS 16 EFTA00585232

Disadvantages of a Family Partnership • potential Disadvantane$ • Carryover of Donor's Tax Basis • Depreciation Risk, i.e. Partnership May Decline in Value • Possible IRS Challenge: • Valuation • Estate Inclusion • Administrative Cost WTAS 17 EFTA00585233