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Dear
We are pleased to have had the opportunity to provide a feasibility
assessment of your familys preparation for coordinating the
practices and operational process for the asset, entities and people
who will be involved in working with you to manage the
diversification of your closely held company stock.
This will begin with introducing you to the strategy, and the
business elements to support it. Then we will perform a discovery
of your current landscape of structures and people, time frame for
getting started, your budget for consulting work. This will befollowed by an onsite visit to discuss with employees and
executives the practices set up and operational processes plus
current systems and technology in use. The on site visit helps us to
understand any gaps, problems and challenges, prioritize solving
them and as well as identify the projects, priorities, budget to build
prior to strategy implementation .
Robin Coady Smith | 302.235.0234Managing Partner
PRESERVATION OF WEALTHCONCENTRATED IN CLOSELY HELD C CORPUSING A FAMILY LIMITED PARTNERSHIP (FLP) &AN EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
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STRATEGIC COORDINATION OFA FAMILY LIMITED PARTNERSHIP (FLP)AND AN EMPLOYEE STOCK OWNERSHIP
PROGRAM (ESOP)
FLPSOP
1990-2004 ESOT Resources, Inc. All rights reserved. FLPSOP is a registered trademark ofESOT Resources, Inc.
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A TAX-ADVANTAGED STRATEGY AND
PLANNING TOOL FOR BUSINESS OWNERS
YOUR CHALLENGES
Is 90% or more of your personal net worth is invested in thehighly appreciated stock of your closely held business?
Do You understand the importance of diversifying some of
your stock? Do you know your choices?
Is your basis in your stock mostly capital gains? How much?
Are you willing to pay capital gains taxes to free up of share-
holder liquidity?
Do you or would your family want to maintain voting and
operational control of your company? If it could be
possible to achieve diversification of your stock while keeping
control, would you?
Do you risk liability exposure? How are you protecting
your hard earned equity value?
Would you know how to compress the value of your assets by
30%, 40% or even 50% to reduce estate taxes?
An ideal tool, the FLPSOP solves these challenges by
creating a tax advantaged, controlled market for closely held
stock. The FLPSOP allows you to remain in full control of
your company. 100% of all costs for shareholder liquidity are
tax deductible corporate expenses and 100% of the stock sale
proceeds can be tax deferred during your lifetime and
eventually eliminated.
FLPSOP
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Family Capital Management Co.
C Corpclosely held
operating company
A BUSINESS PURPOSE
CLIENT RETAINS OPERATIONAL CONTROLOF FLP AS MANAGING DIRECTOR OF FCM.
CLIENT IS MAJORITY SHAREHOLDER OF FCM.
ADULT CHILDREN ARE DIRECTOR/EMPLOYEEAND RECEIVED SALARIES/BENEFITS.
AN OPERATING COMPANY WITH A BUSINESS PURPOSE
NON-FAMILY ARE EITHER SALARIEDSTAFF ONLY OR OFFICER/DIRECTORS.
FAMILY AND SELECT STAFF MAYBE SHAREHOLDERS.
Manages the family interest in C Corp stock, other assets/entities,directs business affairs of the FLP
FLP
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FLPS AND LLCSADD THE OPPORTUNITY FOR
POTENTIAL VALUATION DISCOUNTS
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CAPITALIZING
THE FAMILY LIMITED PARTNERSHIP (FLP)
FLPPARTNERSHIP INTERESTS
ClientcreatestheFLP,appointinganewlyformedCapitalManagement
CoastheGeneralPartneroftheFLP.TheGPretainsthecontrolinterest.
intheFLP.
TheClienttransfersexistingassets,includingtheircloselyheldstocktothe
FLPinexchangetakingbacktheminorityinterest discountedFLPUnits
General Partner manages
CONTROL INTEREST
MINORITY INTERESTSMinority interests may be eligible
for valuation discounts of 30%, 40%or even 50% by a qualified
appraiser.Discounts are for lack ofcontrol and lack of marketability.Valuation discounts increase tax-free gifting and may decreaseestate and gift tax liabilities.
Marketable Securities
Real Estate
C Corporation stock
Oil & Gas Interests
Collectibles & Antiques
WEALTH PRESERVATION
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THE FAMILY LIMITED PARTNERSHIP (FLP)
ASSET PROTECTIONAn FLP is very effective in preventing seizure of assets by futurecreditors. A creditor can not force liquidation of a partnership as ameans to collect on a judgment against a limited partner.
VALUATION DISCOUNTSThe FLP enables valuation discounts of 30 to 50% for lack ofmarketability and lack of control on the part of minority partners.
These valuation discounts can create potentially significant gift taxand estate tax leverage.
RETAINED CONTROLThe business owner retains operational control over the FLP via hisappointment as life time Managing Director of his FCM company.This management company, in turn, serves as General Partner ofthe FLP.
INCOME SHIFTINGBy gifting shares of FCM company to family members and ifif the management company is structured as an S Corp or LLC,the business owner can shift FLP income to family members.
AS A BUSINESS ENTITY, A VALID BUSINESS PURPOSEIS REQUIRED FOR THE FLP. IT MAY NOT BE CREATEDAND RECEIVE VALUATION DISCOUNTS IF IT EXISTS TORECEIVE DISCOUNTS ONLY.
FEATURES/BENEFITS:
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ESOPEMPLOYEE STOCK OWNERSHIP PROGRAM
-Shareholder Liquidity; Tax-deductible funding for- Business Succession; Provides owner with
continuing management control
- Capital Investments; Finance capital in a manner bothdeductible and depreciable
- Wealth Preservation; May reduce owners estate taxby 40 to 50 percent; may reduce owners risk of lossby offering tax-deferred diversification of closely-held stock into a replacement portfolio of stocksand bonds; may eliminate capital gains taxes on highly
appreciated, closely held stock.
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An ESOP is a tax qualified defined contribution retirement plan.It is designed to invest primarily in the common stock ofsponsoring companies and corporations. It is financed with taxdeductible principal payments or a combination of 1) cash 2)seller notes and 3) third party loans. It is also a tool ofcorporate finance for sponsoring companies.
TAX ADVANTAGES OF ESOPS
FOR SPONSORING COMPANIES: 100% of all ESOP costs aretax deductible business expenses. This includes principalpayments on credit facilities used to finance the ESOP stock
purchase and dividends on ESOP shares.
FOR SELLING SHAREHOLDERS: Eligible shareholders canelect to defer capital gains taxes on the sale of closely held CCorp stock to an ESOP. For business owners who have built upsignificant equity values in their company, this provides the witha way to cash out without having to pay capital gains taxes.
FOR EMPLOYEES: An ESOP gives employees the opportunityto receive an employer-paid equity position in the company.That equity value grows in a tax exempt environment.
THE ESOP ELEMENTS OF AN FLPSOP
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Family Capital Management Co.manages the family interest in C Corp, Stock, other assets/entities,
directs business affairs of the FLP
C Corpclosely held
operating company
ESTABLISHING THE ESOP
C Corp creates theESOP and makesdeductible deposits
ESOP
A tax qualified, deferred
contribution retirement plan,providing retirement benefits
and
A control led, tax advantaged
market for c losely held stock.
ESOP sharesto participants
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Family Capital Management Co.
FLP ESOP
SHAREHOLDER EQUITY
FLP SELLS
C CORP
STOCK TO
THE ESOPBASED ON
BUY/SELLA
GREEMENT
TERMS
C Corpclosely held
operating company
FORMALIZES BUY/SELL
ISSUES
PUT OPTIONS
TO ESOP SHARE-
HOLDERS
Marketable SecuritiesReal Estate
C Corporation stock
control interest shares
Oil & Gas Interests
Collectibles & Antiques
Put options enableshareholders the right todemand liquidity for their
ESOP shares atRetirement, Disability,Death or Termination.
At least 30%of equity valuemust be owned by ESOP
before Section 1042 rolloverbecomes available. Rollover
securities purchased here
1
2
3
ESOP STOCK PURCHASE
FLP IS SELLING SHAREHOLDER TO ESOP
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EMPLOYEE STOCK OWNERSHIP PROGRAM(ESOP)
BUSINESS SUCCESSION ADVANTAGESCreate economic leverage by loaning tax free death benefits tothe ESOP. The ESOP acquires shares of company stock.Eliminates concessions normally required in third party sales.Eliminates capital gains taxes on the sale of highly appreciated,
closely held company stock.
SHAREHOLDER LIQUIDITY & DIVERSIFICATIONThe sponsoring company, in creating the ESOP incurs an obligationto eventually repurchase ESOP shares when it comes time to paybenefits to participants and beneficiaries.In privately held companies, the IRS rules require the ESOP to provideparticipants and beneficiaries with a series of put option
opportunities to convert their ESOP stock accounts into cash.The strength of the sponsoring companys ability to honor put optionsin a timely manner is a critical cornerstone of ESOP share values.For example, the stronger the ability to meet benefit payments,the lower the valuation discount for lack of marketability and thehigher the potential sale price for the business owner.
TAX ADVANTAGED INVESTMENTSAn indexed universal life policy is ideal for establishing a taxadvantaged, dedicated reserve fund to accumulatecash for future ESOP benefit payments. In general, most companiesthat sponsor an ESOP should deposit $50,000 to $60,000 per yearfor every $1 million of stock owned by the ESOP. This is to createthe solid foundation for payment of ESOP benefits.
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IRC Section 1042 TAX DEFERRED ROLLOVER
A 1042 rollover is similar to 1035 exchange of like property.
In a 1042 rollover, the selling shareholder* is completing atax deferred exchange of 100% of the fair market value oftheir closely held company stock for a diversified portfolio ofpublicly traded securities.
*Selling shareholder must be an individual, trust, estate or partnership. Theselling shareholder must have owned the shares that are sold to the ESOP for atleast 3 years prior to date of sale. It may be possible that the clients own holdingperiod for the closely held stock can be carried over the FLP and tacked on theselling shareholders holding period.
PERMISSIBLE 1042 ROLLOVER INVESTMENTS qualified replacement property: equity or debt securities of US domiciled operating corporations, either publiclytraded or privately held.
Investments NOT Qualified as Replacement Property: mutual funds real estate US Government securities Municipal bonds & annuities
Life Insurance Promissory Notes Certificates of Deposit Savings Accounts Collectibles
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1042 ROLLOVER
Rollover is a deferral of capital gains tax. However, carefulplanning is required to maintain the deferral and theachieve the eventual elimination of capital gains tax.
Certain events can result, accidentally, or intentionally,
in a disposition which means a taxable event happensthat triggers payment of the deferred capital gains tax.
THE 4 MAIN TRIGGER EVENTS include: Sales Maturity Calls by the issuer
Seizure of rollover investments by a judgment creditor
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Family Capital Management Co.
BUY SELL AGREEMENT FUNDING
C Corpclosely held
operating company
C CORP TAKES COLLATERAL ASSIGNMENTIN CASH VALUES & DEATH BENEFITS
IRREVOCABLE INSURANCETRUST
CASH
SHAREHOLDERS
STOCK
LOAN TAX FREE$ TO ESOP TO
PURCHASEREMAINING STOCK
ESOP
Marketable Securities
Section 1042 Securi ties
Real EstateControl in terest shares
of C Corp Stock
Oil & Gas Interests
Collectibles & Antiques
FLP
BUSINESS SUCCESSION
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Partnership EntityAdministration
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Partnership StructureExample
Client
Spouse
Child
Child
Family CapitalManagement Co.
Limited PartnershipAccount 1
Operating CashAccount
Vehicles
Limited PartnershipAccount 2Real Estate
Limited Partnership
Account 3Majority Interest FCM
Limited PartnershipAccount 4
1042 Rollover Securities
Limited PartnershipAccount 5
Investment Portfolio
Taxable
$ Contributions
Initial & future
PartnershipDistributions
Tax Liability
Valuationof
Partnership
Units (NAV)
Current/FutureMinority Partners
Majority Partner
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Inside the Partnership
Example
CASHFORFUNDING
ACCOUNT2
ACCOUNT4
CUSTODY
EQUITYSTYLES- %ofportfolio
OPERATINGACCOUNT
ACCOUNT5
ALLCONTRIBUTIONS,
WITHDRAWAL,EXEPNSESCOMEFROMHERE
INCOME & OVERDRAFTSIncomestaysinaccountwhereearneduntilmovedtotheOperatingAccount.
Overdraftsarenotcuredbymovingcashfromcashforfundingoroperatingaccount
Amortization/AccretionsonbondportfoliosadjustPtoIorItoPofthe
Bondportfoliosubaccount
EXPENSESCustody,advisoryorinvestmentmanagementfeescomesfromrespective
managersubaccount.
Miscellaneousexpensesareallocatedpro-rataacrossaccounts.
Sample
Sub accounts
Of Master
Custody
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FLP FCG ENTITIES
INSIDE
BASIS
OUTSIDE
BASIS
UNITS OF
PARTNERSHIP
VALUE OF UNITS
IS BASED ON NAV
OF
SECURITIES HELD
INSIDE THE FLP
REAL ESTATE BUSINESS
INTEREST
MARKETABLESECURITIES
VALUATION OF
PARTNERSHIP IS
MARKET VALUE OR
APPRAISED VALUES
OST BASIS
F ASSETS
EMAINS
HE
CTUAL
ASIS
COST BASISOF FLP UNITS
IS THE
STARTING
NAV EITHER
$1 OR $10
ARE COMMO
CHOICES
Partnership Basis Tracking(inside vs. outside basis)
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Necessary
Supporting Services
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Accounting Hub
The diversity of investments and non financial assets as well asentities involved in todays wealth transfer or wealth managementstrategies requires an integrated hub of accounting software in order to
accurately account and report, as well as to provide accuratestatements to shareholders and stakeholders.
Accounting systems may include any one or more of;
General Ledger Partnership Accounting Financial Accounting
Investment Accounting Trust Accounting
As well, systems also include integration of systems and spreadsheetsthat ordinary would not see each other or share information or datawith an interface.
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General Ledger
A general ledger is highly necessary to track the many items of dataand transactions related to non publicly traded assets as well as debitsand credits to and from general ledger categories of the business.
A general ledger is the cornerstone of accuracy of an accounting hub inboth operating businesses, as well as the business of family wealthmanagement in either a family office, a capital management firm or aprivate family trust company, as best fits each case.
A general ledger must often integrate with other accounting systemssuch as partnership accounting, investment accounting or trustaccounting
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Partnership Accounting
Reporting Needs of the Partnerships
Monthly liquidity Monthly valuation of NAV Monthly valuation of Partners Capital Account
Due to the complexity of many partnerships, partnership accounting ishighly necessary to track the many data points which may come froma general ledger or either manual or aggregation of data from manydifferent sources.
The appropriate data should automatically load into the partnershipaccounting software. Partnership accounting will maintain thepercentage of each partnership owned by each other partnership entity,individual or trust. The frequency of updates will be based on thenature of the non-publicly traded assets held in one or morepartnerships. It is not uncommon for non-publicly traded assets to bepriced annually.
The partnership accounting will facilitate preparation of K-1s for eachpartnership.
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Master or Unitized
Custody Services
Operational and Administrative Services
Custodians take on many different forms and provide different levels ofservice. Some firms provide custody at seemingly no cost. This does notmean one custody service is the right fit in all arrangements.
Custody performs the following services:
Safe keep securities Process security purchases, sales, and deliveries
Collect and post interest, dividends, and other payments Maintain detailed records of transactions and portfolio holdings Deliver comprehensive account reports, on line access, on line statements Automatically sweep cash balances into desired short-term investment
vehicles Monitor and collect both ordinary and extraordinary trustee fees and
investment manager fees Provide tax information to the client and investment manager on a periodic
basis, including 1099s at year-end
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Income
Tax Returns
Personal tax return preparation and filing will be prepared by yourtax preparer. A detailed K-1 from the partnership will be provided
to the beneficiaries by at the beginning of each new year.
Partnership accounting and tax reporting should be the responsibility ofof an experienced accounting firm with demonstrated experience inhandling accounting and tax preparation around partnerships.
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