2012 Gifting – Funding Issues With Hard-to-Value Assets

1. 2012 Gifting – Funding Issues With Hard-to-Value Assets IRS required statement This document (and any attachments) was not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer.

2. Cash or Readily Marketable Security Gift – No Valuation Issues Gift of $5.12M cash or marketable securities Grantor Trust fbo Family • Gift is “clean” with no valuation issues • Fully absorbs gift tax exemption with no gift tax risk (assuming exemption is fully in tact)

3. Gift of Hard-to-Value Asset – Gift Tax Exposure Example: Gift of Discounted LLC units Gift of 25% (25 units) minority interest in LLC valued at $4.875M (per appraisal with 35% discount) Grantor Trust fbo Family • Assume: • FMV of 100% LLC = $30M • Gift of 25% (25 units) $7.5M • Less 35% discount ($2.625M) • Gift valuation reporting position $4.875M (below exemption) *1% (1 unit) valued at 35% discount = $195,000

4. Assume discount on audit reduced from 35% to 20%: • FMV of 100% LLC = $30M • Gift of 25% (25 units) $7.5M • Less 20% discount ($1.5M) • Taxable Gift $6M • Available exemption ($5.12M) • Subject to gift tax $880,000 • 35% rate X 35% • $308,000

5. Different Approaches to Address Gift Tax Exposure • Gift tax “cushion” approach • Cash funding with subsequent sale approach • Full exemption gifting with appraised value • Wandry formula approach • Price adjustment approach

6. Gift Tax “Cushion” Approach • Gift less than available exemption to leave some excess to absorb possible increase in value Gift of x # of LLC interests valued at say $4M (based upon appraised value of LLC units) Grantor Trust fbo Family • Downside – If value accepted as reported on return, some exemption is wasted • If “cushion” is too small, then some gift tax exposure still exists (although less)

7. Example: “Cushion” • Gift 20.513 units x $195,000 per 1%/1 unit (after 35% discount), valued at $4M: • $4M _ $195,000 • Assume 35% discount reduced to 20%; results in 1%/1 unit FMV = $240,000 • 20.513 units x $240,000 = $4,923,120 (covered by exemption) • Assume 35% discount reduced to 15%; results in 1%/unit FMV = $255,000 • 20.513 units x $255,000 = $5,230,815 (some gift tax) = 20.513 units

8. Cash Funding with Subsequent Sale Approach Gift of $5.12M of cash into trust Grantor Trust fbo Family Sale of $5.12M worth of LLC interests (based upon appraised value of LLC units) $5.12M cash paid to Grantor • Report “clean” cash gift on gift tax return • Position that subsequent sale is for fair market value, so no gift • Report sale or not on return and statue of limitation implications

9. Full Exemption Gifting With Appraised Value • Rely on valuation position to make gift of entire $5.12M exemption Gift x # of LLC interests valued at $5.12M (based upon appraised value of LLC units) Grantor Trust fbo Family • Based on appraised value of $195,000 per 1%/1 unit, gift of 26.256 units = $5.12M • $5.12M $195,000 = 26.256 units

10. Assume 35% discount reduced to 20%; results in per 1%/1 unit FMV = $240,000 26.256 units x $240,000 = $6,301,440 (taxable gift)

11. McCord Formula Division Approach Gift 28 LLC units to be divided: $5.12M worth (as finally determined for gift tax purposes) to Trust fbo Family and excess to charity (or possibly GRAT, QTIP) Trust fbo Family $5.12M Grantor Excess above $5.12M Charity

12. Based on appraised value of $195,000 per 1%/1 unit, formula gift of $5.12M equals 26.256 units tentatively – taxable gift to Trust fbo Family • 1.744 units to Charity • Assume 35% discount reduced to 20%; results in 1%/1 unit FMV = $240,000 • $5.12M $240,000 • Balance of 6.667 units gifted (as adjusted on audit) to Charity • Administrative “catch-up” issues with adjustment = 21.333 units gifted (as adjusted on audit) to Trust fbo Family

13. Wandry Formula Approach Gift of $5.12M worth of LLC interests (based upon appraised value of LLC units as finally determined for Federal Gift Tax purposes) Grantor Trust fbo Family • Notice of Appeal filed with 10th Circuit

14. Based on appraised value of $195,000 per 1%/1 unit, formula gift of $5.12M equals 26.256 units tentatively • Report $5.12M transfer on gift return (NOT # of units determined) • Assume 35% discount reduced to 20%; results in 1%/1 unit FMV = $240,000 • $5.12M $240,000 • Administrative “catch-up” issues with adjustment = 21.333 units gifted (as adjusted)

15. Adjustment Clause Approach Gift of x # of LLC interests (based upon appraised value of LLC units) – however, if value of transferred interests exceeds $5.12M as finally determined for Federal Gift Tax purposes, Trust will give Grantor back a Promissory Note for such excess Grantor Trust fbo Family Promissory Note to extent LLC units valued above $5.12M • IRS says “condition precedent” violates public policy • Authority varied on effectiveness • If not effective then owe gift tax on “excess” above $5.12M but Trust still required to give promissory note to Grantor (included in Grantor’s estate)

16. Based upon valuation appraisal per 1%/1 unit FMV = $195,000 (based upon a 35% discount), gift of 26.256 units = $5.12M • Assume 35% discount reduced to 20%; results in 1%/1 unit FMV = $240,000 • 26.256 units x $240,000 = $6,301,440 • Available Gift Exemption ($5,120,000) • Promissory Note from Trust to Grantor $1,181,440