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Thomason Family Wealth Goal Achiever - InKnowVision Advanced Estate Planning
 

Thomason Family Wealth Goal Achiever - InKnowVision Advanced Estate Planning

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The Family Wealth Goal Achiever™ is a plan design book (like a blueprint) that explains in easy to understand text and graphics the planning ideas being recommended by the planning team. It solves ...

The Family Wealth Goal Achiever™ is a plan design book (like a blueprint) that explains in easy to understand text and graphics the planning ideas being recommended by the planning team. It solves for high net worth tax planning, advanced estate planning, business transition planning, asset protection planning.

Learn more at www.inknowvision.com

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Thomason Family Wealth Goal Achiever - InKnowVision Advanced Estate Planning Thomason Family Wealth Goal Achiever - InKnowVision Advanced Estate Planning Presentation Transcript

  • InKnowVision’s Monthly HNW Webinar Series Case Study Webinar ©2012. InKnowVision LLC. All rights reserved. www.inknowvision.com
  • FAMILY WEALTH GOAL ACHIEVER™ - INITIAL PREPARED FOR: JOHN THOMASON August 16, 2011 PRESENTED BY Scott Hamilton InKnowVision, LLC 715 Enterprise Dr. Oak Brook, IL 60523 Phone: 630)596-5090Copyright 2011 InKnowVision, LLC
  • YOUR GOALS AND OBJECTIVES JOHN THOMASONMaintain my customary lifestyle. This should take about $200,000 annually after taxes and gifts.Continue revinvesting profits into Oil Trucking to build business value.Explore incentive options for our key employee that will help to ensure business continuity and growth.Provide an inheritance for my daughters in a manner which will provide them with ample opportunities andencourages them to be productive.Provide for a significant charitable gift.Reduce income taxes if possible.Eliminate or reduce estate taxes. Page 2
  • FAMILY INFORMATION JOHN THOMASON CLIENT John Thomason Date of Birth June 2, 1963 132 Main St. CHILDREN CHILDS NAME DATE OF BIRTHMelissa Thomason August 11, 1995 Katie Thomason September 26, 1998 Page 3
  • PERIODIC TABLE OF ESTATE PLANNING ELEMENTS - CONSIDERED JOHN THOMASONIn our planning process, we start with the universe of available planning tools. While this universe is constantly changing, the following chartoutlines many of the available tools. We examine each of these strategies and discard those that are not suitable for meeting your goals andobjectives. Charitable Family Limited Grantor Retained Charitable Lead Remainder Uni- 412(e) Private Annuity SCIN Liability Company Annuity Trust Annuity Trust Trust Qualified Personal Sale for Installment Series Limited Trust Owned Life Family LLC TCLAT Flip CRT Residence Trust Note Liability Company Insurance Preferred Limited Long Term Care Maximized Gift to Corporate Premium Finance Business, LLC ILIT partnership Insurance Trust Recapitalization Charitable Life Annuity Walton GRAT Private Foundations Investments, LLC Asset Protection Loan to Trust Estate Withdrawal Revocable Living Principal Protected International Irrevocable Non-SPIA/Life in a CLAT Trusts, DPAs and Crummey Powers Dynasty Trust Notes VUL Grantor Trust POAs Supporting Captive Insurance IRA to Charity Gift Annuity Remainder Sales Life Estates LLC/CRTs Organizations Company Charitable Succession Defined Benefit Qualified Plan Bargain Sales Risk Management Remainder Annuity ESOP Planning Planning Plans Limited Partnership Trust Page 4
  • INTRODUCTION TO THE PLAN STRATEGIES ROADMAP JOHN THOMASONThe following section of the plan contains a step by step roadmap for each of the strategies that we are recommending.You will notice that the strategies are often interdependent; that is, in order for one strategy to be successful, you mustcomplete another strategy as well. It is the integration of each of these strategies that allows you to most efficientlyaccomplish your goals.Also keep in mind that there is often more than one way to get from point A to point B. This is true in wealth transferplanning. If a particular strategy or combination of strategies is not acceptable to you, we may be able to reach the desiredresult in a less efficient but perhaps more acceptable way.The following pages are a conceptual road map only. There are numerous details contained in each strategy that are notdetailed in the overall plan that follows. Page 5
  • JOHN THOMASONBUSINESS PLANNING OPPORTUNITIES Page 6
  • KEY EMPLOYEE JOHN THOMASONOil Trucking has a key employee who is responsible for many of the supplier relationships.Goal: Protect company from the death, disability or termination of key employee.Ideas1) Diversify supplier relationships to one or more company employees2) Train new employees to do job of key employee3) Train suppliers to accept new employees4) Create incentives for your key employee based on company reaching its goals a. Cash bonus for reaching certain goals b. Continued salary for management of new employees5) Provide security for key employee throughout process a. Pool of cash for retirement, subject to i. Reaching company goals ii. Vesting6) Keep key employee from feeling threatened by the changes a. Constant reassurance b. Written contract7) Keep key employee from leaving and taking relationships elsewhere a. Non-compete b. Non-disclosure c. Tie leaving to financial loss8) Key person insurance on key employee Page 7
  • KEY EMPLOYEE JOHN THOMASONGoal: Retain key employee in case of death or disability of owner.Ideas1) Deferred bonus based on key employee staying with the company after death or disability of owner2) Employee contract3) Non-compete/non-disclosure4) Key person insurance on Johns life. Could be integrated with insurance purchased for inheritance5) Identify/hire employee capable of taking over Johns role as manager Page 8
  • JOHN THOMASON INHERITANCE PLANNINGOPPORTUNITIES Page 9
  • CREATE AN IRREVOCABLE NON-GRANTOR TRUST JOHN THOMASON John creates an irrevocable non-grantor trust. The Trust can be drafted to provide asset protection and long term estate tax savings through the use of dynasty trust provisions. JOHN THOMASON NON-GRANTOR TRUSTNote: Trust should be formed in a jurisdiction thatprovides favorable GST planning and state income taxplanning. HEIRSPotential Jurisdictions: Beneficiaries can include children and future- Alaska generations- South Dakota- Wyoming- Nevada- Delaware Page 10
  • GIFT TO NON-GRANTOR TRUST JOHN THOMASONJohn makes a gift of $5,000,000 of his non-voting interests in Business, LLC (assumed to be 50%) to the Trust. This gift is designed tomaximize available gifting exemption with an appreciating asset. Gift of non-voting interests in JOHN THOMASON Business, LLC worth NON-GRANTOR TRUST $5,000,000 Owns non-voting interests in Business, LLC worth $5,000,000 HEIRSPlanning Goals Accomplished: - Controls assets so inheritance provides opportunities while minimizing problems for children, grandchildren and future generations. - Reduces estate taxes on appreciating assets - Provides enhanced asset protection - Heirs can have access to income generated from assets in the trust, while not being burdened with asset management decisions Page 11
  • SELL BUSINESS, LLC INTERESTS TO TRUST JOHN THOMASON John sells remaining non-voting interests in Business, LLC (assumed to be 50%) to the Trust for an installment note. Sell Business, LLC interests JOHN THOMASON worth $5,000,000 NON-GRANTOR TRUST Owns Business, LLC interests worth $5,000,000John owns an installment note after the sale Installment note worth from the sale and interests worth $5,000,000 from $5,000,000 that provides the gift annual payments of $193,000 *Note payments are interest only at 3.9%. HEIRS Receive assets in the future according to terms of the trust Page 12
  • LOAN TO TRUST JOHN THOMASONInvestments, LLC loans $5,000,000 of cash/securities to the Trust. These loan proceeds will help provide the necessary cash flow tocontinue reinvesting cash back into Oil Trucking. Loans $5,000,000 of INVESTMENTS, LLC cash/securities to the trust NON-GRANTOR TRUST Owns an additional $5,000,000 of Owns a note payable cash/securities Note worth $5,000,000 that makes annual interest payments of $100,000 for 8 years with full repayment in year 9 Page 13
  • DYNASTY TRUST/FAMILY BANK TO HOLD INHERITANCES JOHN THOMASONThe Trust should be set-up as a Dynasty Trust. This trust would hold the inheritances for children and future generationsin a asset protected and tax advantaged trust, while protecting heirs from having too much too soon.The example on this page assumes annual distributions of 1% of the total Trust principal. This payout could be higher orlower. In addition, payments of principal could be made for health, education, maintenance, support or other items youfeel would be appropriate to allow. DYNASTY TRUST/FAMILY BANK FOR CHILDREN $26,333,336 For example the Trust could distribute annual income to beneficiaries MELISSA KATIE $131,667 $131,667The Trust, acting as a family bank, may lend money to an heir to purchase a home or to start a business but will firstassess the appropriateness of the transaction against a set of guidelines that have been drafted into the formationdocuments. Page 14
  • PURCHASE LIFE INSURANCE IN THE TRUST JOHN THOMASONTrustees of the Trust purchase 20 year term life insurance with the Trust assets. This assures an inheritance regardless of the shortterm performance of the business. NON-GRANTOR TRUST LIFE INSURANCE Owns 20 Year Term Life Insurance $20,000,000Premium Payment DetailsPremium in the amount of $40,000 is paid with the earnings and capital of the Trust. Thepremium is scheduled to be paid for 20 years when the policy expires.The premium is based on certain assumptions. This is for illustration purposes only. Actual insurance numbers can only be determined byapplying for insurance. Page 15
  • INSURANCE PREMIUMSWe examined several premium payment options. The term insurance has the lowest cost in terms of net present value. However, insurance is notguaranteed to continue after year 20, as it would with the other policies shown. YEAR PRINCIPAL ** PRUDENTIAL HANCOCK PRINCIPAL METLIFE 2011 40,000 887,840 744,760 1,176,460 161,100 2012 40,000 - - - 161,100 2013 40,000 - - - 161,100 2014 40,000 - - - 161,100 2015 40,000 - - - 161,100 2016 40,000 - - - 161,100 2017 40,000 - - - 161,100 2018 40,000 - - - 161,100 2019 40,000 - - - 161,100 2020 40,000 - - - 161,100 2021 40,000 202,100 256,760 - 161,100 2022 40,000 202,100 256,760 - 161,100 2023 40,000 202,100 256,760 - 161,100 2024 40,000 202,100 256,760 - 161,100 2025 40,000 202,100 256,760 - 161,100 2026 40,000 202,100 256,760 - 161,100 2027 40,000 202,100 256,760 - 161,100 2028 40,000 202,100 256,760 - 161,100 2029 40,000 202,100 256,760 - 161,100 2030 40,000 202,100 256,760 - 161,100NPV of Premiums 498,488 2,331,812 2,597,517 1,120,438 2,007,662Reflects the present value of premiums paid over 20 years with a discount rate of 5%All policies would lapse in year 21 without additional premiums paid.** Principal 20 year term insurance Page 16
  • JOHN THOMASONCHARITABLE PLANNING OPPORTUNITIES Page 17
  • TESTAM TESTAMENTARY CHARITABLE LEAD ANNUITY TRUST (Part I) JOHN THOMASON Include language in your trust or will that creates a testamentary charitable lead trust (TCLAT) at your death. JOHN THOMASON TCLAT At death $15,746,548 of the assets taxable TCLAT owns assets with a value of in your estate will pass to the TCLAT. This $15,746,548 after your death should bring your estate tax to $0 THOMASON FAMILY CHARITY TCLAT Assumptions The charity will receive payments of $844,912Asset growth rate 5.00% each year for a period of 25 years totalingTCLAT payout rate 5.37% $21,122,811Present value discount rate 5.00%Assumed date of death 2011 Page 18
  • TESTAMENTARY CHARITABLE LEAD ANNUITY TRUST (Part II) JOHN THOMASON At the end of the TCLAT term, your heirs will receive all of the remaining trust assets. TCLAT HEIRS Based on the plan assumptions, your heirs could expect to inherit $8,710,301 from theAt the end of the 25 year term, the TCLAT TCLAT. The amount passing to heirs is a assets will be distributed to your heirs present value number using a discount rate of 5%Note: The amount passing to beneficiaries is entirely dependent on the rate of return of the assets in the trust. Ahigher rate of return means more passing to heirs and a lower rate of return could mean that nothing passes toheirs. Page 19
  • JOHN THOMASONADDITIONAL TAX AND BUSINESS PLANNING Page 20
  • CREATE A CAPTIVE INSURANCE COMPANY JOHN THOMASON You, or a trust, create and own a captive insurance company. The captive is formed to insure currently insured and uninsured risks of Business, LLC - Oil Trucking. BUSINESS, LLC - OIL TRUCKING Premium CAPTIVE INSURANCE COMPANY Risk CoverageIn the plan we have assumed that the Captive is owned by a trust.This provides inheritance and estate tax benefits as well as income taxbenefits.Planning Goals Accomplished: - Asset protection - Effective tool for passing a tax advantaged inheritance - Creates income tax deferral for the company and increases current investment capital Page 21
  • COMPANY INSURES RISKS JOHN THOMASON The Captive Insurance Company insures various risks of loss. Pay annual premiums of $1,000,000 to cover risk of loss. Premiums for insurance are deductible if theyre ordinary BUSINESS, LLC - OIL TRUCKING CAPTIVE INSURANCE COMPANY and necessary business expenses Risk CoveragePremium is paid from the cash flow of Oil Trucking, which includestax savings and loan proceeds as detailed later in the plan. UNDERWRITING PROFITSNet premium of up to $1.2M is excludable from captive companyincome if proper tax election is made. Underwriting profits of the captive will ultimately be distributed out to the owner of the captive Page 22
  • PERIODIC TABLE OF ESTATE PLANNING ELEMENTS - RECOMMENDED JOHN THOMASONThe highlighted tools are those we have determined are most suited to achieving your goals and objectives. Charitable Family Limited Grantor Retained Charitable Lead Remainder Uni- 412(e) Private Annuity SCIN Liability Company Annuity Trust Annuity Trust Trust Qualified Personal Sale for Installment Series Limited Trust Owned Life Family LLC TCLAT Flip CRT Residence Trust Note Liability Company Insurance Preferred Limited Long Term Care Maximized Gift to Corporate Premium Finance Business, LLC ILIT partnership Insurance Trust Recapitalization Charitable Life Annuity Walton GRAT Private Foundations Investments, LLC Asset Protection Loan to Trust Estate Withdrawal Revocable Living Principal Protected International Irrevocable Non-SPIA/Life in a CLAT Trusts, DPAs and Crummey Powers Dynasty Trust Notes VUL Grantor Trust POAs Supporting Captive Insurance IRA to Charity Gift Annuity Remainder Sales Life Estates LLC/CRTs Organizations Company Charitable Succession Defined Benefit Qualified Plan Bargain Sales Risk Management Remainder Annuity ESOP Planning Planning Plans Limited Partnership TrustGreen equals a new Blue equals a social Yellow equals an planning tool for capital or existing planning family charitable tool tool Page 23
  • JOHN THOMASONLIFETIME SPENDING AND LIQUIDITY Page 24
  • PERSONAL SPENDING VS. INCOME - PROPOSED PLAN JOHN THOMASON $900,000 $800,000 $700,000 $600,000 - Retirement - No salary from Oil $500,000 Trucking $400,000 Reduction in salary lowers income tax liability $300,000 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Annual Cash Flow Income Total Living ExpensesThis chart compares your personal cash flow income to cash flow expense under the proposed plan year by year for 20 years. Page 25
  • TRUST SPENDING VS. INCOME - PROPOSED PLAN JOHN THOMASON $22,000,000 $20,000,000 $18,000,000 Sale of Oil Trucking $16,000,000 $14,000,000 $12,000,000 Includes Loan - $10,000,000 proceeds from Investments, LLC Loan repayment $8,000,000 from Trust $6,000,000 $4,000,000 $2,000,000 $- 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Annual Cash Flow Income - Trust Total Expenses - TrustThis chart compares cash flow income to cash flow expense inside of the Trust under the proposed plan year by year for 20 years. In years 2011 - 2017,expenses include annual cash reinvestments into Oil Trucking. Page 26
  • YOUR LIQUID ASSETS - PROPOSED PLAN JOHN THOMASON $35,000,000 $30,000,000 $25,000,000 - $20,000,000 $15,000,000 $10,000,000 $5,000,000 $- 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Liquid Assets - Proposed PlanThis illustrates your readily available liquid assets over the next 20 years. Promissory notes are not considered liquid assets until repaid. We are showingassets as liquid during the first 8 years of the plan, although some of these assets may currently be pledged as collateral. Page 27
  • JOHN THOMASONINCOME TAX DEFERRED Page 28
  • COMPARISON OF INCOME TAX RESULTS - PLAN YEAR 2011 JOHN THOMASON Existing Plan Proposed Plan Captive Taxes Deferred State Tax Saved 2011 Estimated Income Tax $ 839,000 $ 457,000 $ 350,000 $ 107,000 2012 Estimated Income Tax $ 925,000 $ 528,000 $ 350,000 $ 178,000 2013 Estimated Income Tax $ 1,215,000 $ 675,000 $ 350,000 $ 325,000 2014 Estimated Income Tax $ 1,339,000 $ 770,000 $ 350,000 $ 420,000 2015 Estimated Income Tax $ 1,477,000 $ 876,000 $ 350,000 $ 526,0005 Year Estimated Tax Deferred $ 1,750,000 $ 1,556,000Proposed plan income taxes include those of the Trust. Tax amounts are approximations. Page 29
  • JOHN THOMASONINCREASE INHERITANCEAND REDUCE ESTATE TAX Page 30
  • COMPARISON OF PLAN RESULTS - PLAN YEAR 2011 JOHN THOMASON Existing Plan Proposed Plan Advantage Estate Value $ 22,577,993 $ 16,529,324 Heirs Receive Immediately $ 16,262,688 $ 26,333,336 $ 10,070,648 Heirs Receive from Deferred Inheritance $ - $ 3,982,824 $ 3,982,824 Total Benefits to Family $ 16,262,688 $ 30,316,160 $ 14,053,471 Family Charity $ - $ 16,339,031 $ 16,339,031 Estate and Income Tax $ 6,064,525 $ - $ 6,064,525This chart assumes that you die this year and compares the results of the current plan with the proposed plan.Deferred Inheritance is a general approximation based on the long term performance of the TCLAT. Page 31
  • COMPARISON OF PLAN RESULTS - PLAN YEAR 2030 JOHN THOMASON Existing Plan Proposed Plan Advantage Estate Value $ 71,874,283 $ 36,119,098 Heirs Receive Immediately $ 32,354,543 $ 64,034,698 $ 31,680,155 Heirs Receive from Deferred Inheritance $ - $ 8,710,301 $ 8,710,301 Total Benefits to Family $ 32,354,543 $ 72,744,998 $ 40,390,455 Family Charity $ - $ 35,732,907 $ 35,732,907 Estate and Income Tax $ 38,775,997 $ - $ 38,775,997 Present Value of total to Heirs $12,803,791 $28,787,666 Discount rate for PV calculation 5.00%This chart assumes that you die in 2030 and compares the results of the current plan with the proposed plan.Deferred Inheritance is a general approximation based on the long term performance of the TCLAT. Page 32
  • COMPARISON OF PLAN RESULTS - PLAN YEAR 2031 JOHN THOMASON Existing Plan Proposed Plan Advantage Estate Value $ 76,015,872 $ 37,875,234 Heirs Receive Immediately $ 34,199,621 $ 47,109,406 $ 12,909,785 Heirs Receive from Deferred Inheritance $ - $ 9,134,098 $ 9,134,098 Total Benefits to Family $ 34,199,621 $ 56,243,504 $ 22,043,883 Family Charity $ - $ 37,471,481 $ 37,471,481 Estate and Income Tax $ 41,031,092 $ - $ 41,031,092 Present Value of total to Heirs $13,533,951 $22,257,464 Discount rate for PV calculation 5.00%This chart assumes that you die in 2031 and compares the results of the current plan with the proposed plan.Deferred Inheritance is a general approximation based on the long term performance of the TCLAT. Page 33
  • COMPARISON OF PLAN RESULTS - PLAN YEAR 2030 JOHN THOMASON Proposed Plan - Captive Proposed Plan - No Captive Captive Advantage Estate Value $ 36,119,098 $ 36,119,098 Heirs Receive Immediately $ 64,034,698 $ 58,308,614 $ 5,726,084Heirs Receive from Deferred Inheritance $ 8,710,301 $ 8,710,301 $ - Total Benefits to Family $ 72,744,998 $ 67,018,914 $ 5,726,084 Family Charity $ 35,732,907 $ 35,732,907 $ - Estate and Income Tax $ - $ - $ - Present Value of total to Heirs $28,787,666 $26,521,660 Discount rate for PV calculation 5.00%This chart assumes death in 2030, and compares the results of the current plan with the proposed plan without a Captive InsuranceCompany.Deferred Inheritance is a general approximation based on the long term performance of the TCLAT. Page 34
  • ASSETS PASSING TO YOUR FAMILY - CURRENT VS. PROPOSED JOHN THOMASON $80,000,000 $70,000,000 $60,000,000 $50,000,000 - $40,000,000 $30,000,000 $20,000,000 $10,000,000 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Current Plan Proposed Plan Proposed Plan - No Life InsThis chart compares the amount of your assets that will pass to heirs after estate taxes and costs of implementation in the current plan as against theproposed plan. Page 35
  • JOHN THOMASON INCREASE INCHARITABLE GIVING Page 36
  • COMPARISON OF CHARITY RESULTS - PLAN YEAR 2011 JOHN THOMASON Existing Plan Proposed Plan Increase in CharityCharity Receives from TCLAT $ - $ 16,300,000 $ 16,300,000 Family Charity $ - $ 16,300,000 $ 16,300,000 Page 37
  • COMPARISON OF CHARITY RESULTS - PLAN YEAR 2030 JOHN THOMASON Existing Plan Proposed Plan Increase in CharityCharity Receives from TCLAT $ - $ 35,700,000 $ 35,700,000 Family Charity $ - $ 35,700,000 $ 35,700,000 Page 38
  • DETAILED FINANCIAL ANALYSIS JOHN THOMASON INTRODUCTIONThe following section of the plan contains all of the financial analysis used to show you where youstand with your current plan and what is possible with the proposed plan.All of the numbers are based on information provided by you or gleaned from statements and taxreturns. If numbers do not look correct, please let us know so that we can make the appropriatechanges.Assumed growth and yield numbers are all listed on the Net Worth contained in these sections. Page 39
  • DETAILED FINANCIAL ANALYSIS JOHN THOMASON CURRENT PLAN FINANCIALSIn the Current Plan Section you will find a current balance sheet and detailed cash flow and assetprojection analysis. Page 40
  • CURRENT NET WORTH STATEMENT JOHN THOMASON JOHN YIELD GROWTHMARKETABLE SECURITIES Investments, LLC (100%) 10,130,856 2.0% 5.0% Total of Marketable Securities 10,130,856 2.0% 5.0%OTHER INVESTMENTS Business, LLC (100%) 10,000,000 20.0% 0.0% Hobby, LLC (100%) 1 0.0% 5.0% Total of Other Investments 10,000,001 20.0% 0.0%RESIDENTIAL REAL ESTATE 132 Main St. 800,000 0.0% 3.0% Total of Personal Residences 800,000 0.0% 3.0%TOTAL ASSETS 20,930,857TOTAL LIABILITIES -NET WORTH 20,930,857 Page 41
  • FINANCIAL ANALYSIS - EXISTING PLAN ASSET VALUE PROJECTIONS - EXISTING PLANYEAR Current 2011 2012 2013 2017 2018 2019 2025 2030Asset ValuesMarketable securities 10,130,856 10,669,067 11,572,136 12,351,693 15,958,652 17,120,217 18,239,024 26,685,665 36,672,892Other investments ** 10,000,001 11,100,001 12,321,001 13,676,311 20,761,603 18,811,602 19,752,182 26,469,814 33,782,935Personal residences 800,000 808,925 833,193 858,189 965,899 994,876 1,024,722 1,223,572 1,418,455Total assets in estate 20,930,857 22,577,993 24,726,330 26,886,192 37,686,153 36,926,695 39,015,929 54,379,050 71,874,283 Net worth 20,930,857 22,577,993 24,726,330 26,886,192 37,686,153 36,926,695 39,015,929 54,379,050 71,874,283** Includes Business, LLC. After the sale of Oil Trucking, we assume a growth rate of 5% for the assets inside of Business, LLC.In the event that there is a cash flow surplus, the surplus is added to the marketable securities row by default.If there is a cash flow shortage (because of spending or gifting capital) then the shortage is treated as a reduction in marketable securities. Page 42
  • TAXABLE INCOME PROJECTIONS - EXISTING PLANYEAR Current 2011 2012 2013 2017 2018 2019 2025 2030Sources of taxable incomeMarketable securities 202,617 213,381 231,443 299,546 319,173 342,404 500,873 688,244Other investments ** 2,000,000 2,220,000 2,464,200 3,740,829 - 376,232 504,187 643,484Cap Gains from Sale of Oil Trucking - - - - 6,500,001 - - -Client earned income 287,808 287,808 287,808 287,808 287,808 - - - -Gross income 2,490,425 2,721,189 2,983,451 4,328,183 6,819,174 718,636 1,005,060 1,331,729** Income from Business, LLC. After the sale of Oil Trucking, we assume a yield of 2% on the assets inside of Business, LLC. Page 43
  • INCOME TAX PROJECTIONS - EXISTING PLANYEAR Current 2011 2012 2013 2017 2018 2019 2025 2030Income tax EstimationAdjusted gross income:Dividend income (marketable sec.) 202,617 213,381 231,443 299,546 319,173 342,404 500,873 688,244Capital Gains Income - - - - 6,500,001 - - -Earned and other income 2,287,808 2,507,808 2,752,008 4,028,637 - 376,232 504,187 643,484 Adjusted gross income 2,490,425 2,721,189 2,983,451 4,328,183 6,819,174 718,636 1,005,060 1,331,729DeductionsReal estate tax 12,495 12,495 12,870 13,256 14,920 15,367 15,828 18,900 21,910State income taxes 136,973 149,665 164,090 238,050 375,055 39,525 55,278 73,245Interest 35,423 35,423 36,486 37,580 42,297 43,566 44,873 53,580 62,114Charitable gifts 117,859 117,859 121,395 125,037 140,730 144,952 149,300 178,272 206,666Charitable Deduction available 117,859 121,395 125,037 140,730 144,952 149,300 178,272 206,666Charitable Deduction allowed 117,859 121,395 125,037 140,730 144,952 149,300 178,272 206,666Total deductions 302,750 320,416 339,963 435,996 578,939 249,526 306,031 363,936Reductions - - (84,500) (124,841) (199,571) (16,555) (25,148) (34,948)Deductions allowed 302,750 320,416 255,463 311,155 379,368 232,971 280,883 328,988Taxable income 2,187,675 2,400,774 2,727,988 4,017,028 6,439,806 485,665 724,176 1,002,741Federal and State income tax 839,450 924,574 1,215,010 1,799,431 1,659,566 202,486 312,690 440,968 Page 44
  • CASH FLOW PROJECTIONS - EXISTING PLAN 4,600,000 5,821,000 7,176,310 14,261,601 55%YEAR Current 2011 2012 2013 2017 2018 2019 2025 2030Sources of income for LifestyleReturn of Basis in Oil Trucking - - - - 14,261,601 - - -Consumable income (taxable) 2,490,425 2,721,189 2,983,451 4,328,183 6,819,174 718,636 1,005,060 1,331,729Total income available for lifestyle 2,490,425 2,721,189 2,983,451 4,328,183 21,080,776 718,636 1,005,060 1,331,729Uses of CashLiving expenses 200,000 206,000 212,180 238,810 245,975 253,354 302,518 350,701Income tax 839,450 924,574 1,215,010 1,799,431 1,659,566 202,486 312,690 440,968Reinvestment into Business, LLC 1 1,100,000 1,221,000 1,355,310 2,057,456 18,811,602 - - -Total uses of cash 2,139,450 2,351,574 2,782,500 4,095,697 20,717,143 455,840 615,208 791,669Surplus 350,975 369,615 200,950 232,486 363,633 262,796 389,852 540,0601 Assumes 55% of profits from Business, LLC are reinvested back into the business.In the event that there is a cash flow surplus, the surplus is added to the marketable securities row on the "Asset Value Projections" 3 pages earlier.If there is a cash flow shortage (spending or gifting capital) then the shortage is treated as a reduction inmarketable securities row on the "Asset Value Projections" 3 pages earlier. Page 45
  • ESTATE TAX ESTIMATION AND DISTRIBUTION - EXISTING PLANYEAR Current 2011 2012 2013 2017 2018 2019 2025 2030Tax Calculation on Johns deathJohns assets 20,930,857 22,577,993 24,726,330 26,886,192 37,686,153 36,926,695 39,015,929 54,379,050 71,874,283Johns estimated estate 20,930,857 22,577,993 24,726,330 26,886,192 37,686,153 36,926,695 39,015,929 54,379,050 71,874,283Settlement expenses (234,309) (250,780) (272,263) (293,862) (401,862) (394,267) (415,159) (568,791) (743,743)Johns taxable estate 20,696,548 22,327,213 24,454,066 26,592,330 37,284,292 36,532,428 38,600,770 53,810,260 71,130,540Tax base 20,696,548 22,327,213 24,454,066 26,592,330 37,284,292 36,532,428 38,600,770 53,810,260 71,130,540Federal Estate Tax 5,493,792 6,064,525 6,808,923 14,279,982 20,160,561 19,747,036 20,884,623 29,249,843 38,775,997Total Estate Tax Due 5,493,792 6,064,525 6,808,923 14,279,982 20,160,561 19,747,036 20,884,623 29,249,843 38,775,997Distribution of Johns estateSettlement expenses 234,309 250,780 272,263 293,862 401,862 394,267 415,159 568,791 743,743Taxes 5,493,792 6,064,525 6,808,923 14,279,982 20,160,561 19,747,036 20,884,623 29,249,843 38,775,997Residual estate to heirs 15,202,756 16,262,688 17,645,143 12,312,349 17,123,731 16,785,393 17,716,146 24,560,417 32,354,543Total 20,930,857 22,577,993 24,726,330 26,886,192 37,686,153 36,926,695 39,015,929 54,379,050 71,874,283 Page 46
  • SUMMARY OF BENEFITS TO FAMILY - EXISTING PLANYEAR Current 2011 2012 2013 2017 2018 2019 2025 2030Benefits to FamilyResidual estate 15,202,756 16,262,688 17,645,143 12,312,349 17,123,731 16,785,393 17,716,146 24,560,417 32,354,543Total assets to heirs 15,202,756 16,262,688 17,645,143 12,312,349 17,123,731 16,785,393 17,716,146 24,560,417 32,354,543 Page 47
  • DETAILED FINANCIAL ANALYSIS JOHN THOMASON PROPOSED PLAN FINANCIALSIn the Proposed Plan Section you will find a balance sheet which reflects the repositioning of assetsas set out in the step by step roadmap in the proceeding section. You will also find detailed cashflow and asset projection information on each of the proposed planning strategies. Page 48
  • NET WORTH STATEMENT AFTER PLAN IMPLEMENTATION JOHN THOMASON JOHN YIELD GROWTHMARKETABLE SECURITIES Investments, LLC (100%) 10,130,856 2.0% 5.0% Total of Marketable Securities 10,130,856 2.0% 5.0%OTHER INVESTMENTS Hobby, LLC (100%) 1 0.0% 5.0% Total of Other Investments 1 0.0% 5.0%RESIDENTIAL REAL ESTATE 132 Main St. 800,000 0.0% 3.0% Total of Personal Residences 800,000 0.0% 3.0%OTHER STRATEGY ASSETS GDOT Note 5,000,000 3.9% Total of Other Strategy Assets 5,000,000 3.9%TOTAL ASSETS 15,930,857TOTAL LIABILITIES -NET WORTH 15,930,857 Page 49
  • FINANCIAL ANALYSIS - PROPOSED PLAN ASSET VALUE PROJECTIONS - PROPOSED PLANYEAR Current 2011 2012 2013 2017 2018 2019 2020 2030Asset ValuesMarketable securities - Equities 10,130,856 5,720,398 6,332,638 6,933,479 9,680,812 10,298,841 15,949,936 16,885,988 29,700,643Other investments 1 1 1 1 1 - - - -Loan to Trust - 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 - - -Personal residences 800,000 808,925 833,193 858,189 965,899 994,876 1,024,722 1,055,464 1,418,455Note from childrens GDOT 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000Total assets in estate 15,930,857 16,529,324 17,165,832 17,791,669 20,646,712 21,293,717 21,974,658 22,941,452 36,119,098Net worth 15,930,857 16,529,324 17,165,832 17,791,669 20,646,712 21,293,717 21,974,658 22,941,452 36,119,098In the event that there is a cash flow surplus, the surplus is added to the marketable securities row by default.If there is a cash flow shortage (because of spending or gifting capital) then the shortage is treated as a reduction in marketable securities. Page 50
  • TAXABLE INCOME PROJECTIONS - PROPOSED PLANYEAR Current 2011 2012 2013 2017 2018 2019 2020 2030Marketable securities - Equities 202,617 114,408 126,653 178,769 193,616 205,977 318,999 561,584Interest Payment from Trust Note 193,000 193,000 193,000 193,000 193,000 193,000 193,000 193,000Interest Payments from Loan to Trust 100,000 100,000 100,000 100,000 100,000 100,000 - -Client earned income 287,808 287,808 287,808 287,808 287,808 - - - -Gross income 783,425 695,216 707,461 759,577 486,616 498,977 511,999 754,584 Page 51
  • INCOME TAX PROJECTIONS - PROPOSED PLANYEAR Current 2011 2012 2013 2017 2018 2019 2020 2030Income Tax EstimationAdjusted gross income:Dividend income (Marketable Sec.) 202,617 114,408 126,653 178,769 193,616 205,977 318,999 561,584Earned and other income 580,808 580,808 580,808 580,808 293,000 293,000 193,000 193,000Adjusted gross income 783,425 695,216 707,461 759,577 486,616 498,977 511,999 754,584DeductionsReal Estate Tax 12,495 12,870 13,256 14,920 15,367 15,828 16,303 21,910State income taxes 43,088 38,237 38,910 41,777 26,764 27,444 28,160 41,502Interest 35,423 36,486 37,580 42,297 43,566 44,873 46,219 62,114Cash charitable gifts 117,859 121,395 125,037 140,730 144,952 149,300 153,779 206,666Deduction available 117,859 121,395 125,037 140,730 144,952 149,300 153,779 206,666Deduction allowed 117,859 121,395 125,037 140,730 144,952 149,300 153,779 206,666Total deductions 208,865 208,987 214,783 239,723 230,649 237,445 244,461 332,193Reductions - - (16,220) (17,783) (9,594) (9,965) (10,356) (17,634)Deductions allowed 208,865 208,987 198,563 221,940 221,054 227,480 234,105 314,560Taxable income 574,560 486,229 508,897 537,637 265,562 271,497 277,893 440,024Federal and State income tax 181,119 162,996 211,071 225,319 106,653 109,470 112,489 186,389 Page 52
  • CASH FLOW PROJECTIONS - PROPOSED PLAN - - - - 3,500,000 3,500,000 3,500,000 3,500,000 55%YEAR Current 2011 2012 2013 2017 2018 2019 2020 2030Sources of Income for LifestyleConsumable income (taxable) 783,425 695,216 707,461 759,577 486,616 498,977 511,999 754,584Repayment of Loan to Trust - - - - - 5,000,000 - -Distribution from Marketable Securities 4,597,694 - - - - - - -Total income available for lifestyle 5,381,119 695,216 707,461 759,577 486,616 5,498,977 511,999 754,584Uses of CashLiving expenses 200,000 206,000 212,180 238,810 245,975 253,354 260,955 350,701Income tax 181,119 162,996 211,071 225,319 106,653 109,470 112,489 186,389Loan to Trust 5,000,000 - - - - - - -Total uses of cash 5,381,119 368,996 423,251 464,129 352,628 362,824 373,443 537,091Surplus - 326,220 284,209 295,448 133,988 5,136,153 138,556 217,493In the event that there is a cash flow surplus, the surplus is added to the marketable securities row on the "Asset Value Projections" 3 pages earlier.If there is a cash flow shortage (spending or gifting capital) then the shortage is treated as a reduction inmarketable securities row on the "Asset Value Projections" 3 pages earlier. Page 53
  • ESTATE TAX ESTIMATION AND DISTRIBUTION - PROPOSED PLANYEAR Current 2011 2012 2013 2017 2018 2019 2020 2030Tax Calculation on Johns deathJohns assets 15,930,857 16,529,324 17,165,832 17,791,669 20,646,712 21,293,717 21,974,658 22,941,452 36,119,097.7Johns estimated estate 15,930,857 16,529,324 17,165,832 17,791,669 20,646,712 21,293,717 21,974,658 22,941,452 36,119,098Settlement expenses (184,309) (190,293) (196,658) (202,917) (231,467) (237,937) (244,747) (254,415) (386,191)Charitable deduction from TCLAT (15,746,548) (16,339,031) (16,969,173) (17,588,752) (20,415,245) (21,055,780) (21,729,912) (22,687,038) (35,732,907)Taxable estate 0 0 0 0 0 0 0 0 0Plus Johns lifetime taxable gifts 5,000,000 5,000,000 5,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000Tax base 5,000,000 5,000,000 5,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000Federal Estate Tax - - - - - - - - -Distribution of EstateSettlement expenses 184,309 190,293 196,658 202,917 231,467 237,937 244,747 254,415 386,191Taxes - - - - - - - - -Contribution to TCLAT 15,746,548 16,339,031 16,969,173 17,588,752 20,415,245 21,055,780 21,729,912 22,687,038 35,732,907Total 15,930,857 16,529,324 17,165,832 17,791,669 20,646,712 21,293,717 21,974,658 22,941,452 36,119,098 Page 54
  • SUMMARY OF BENEFITS TO FAMILY - PROPOSED PLANYEAR Current 2011 2012 2013 2017 2018 2019 2020 2030Benefits to FamilyValue of Trust 5,000,000 5,140,836 5,945,408 6,866,311 13,573,775 12,165,209 13,297,203 14,285,512 28,329,542Life insurance proceeds GDOT 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000Captive Insurance Accumulation 250,000 1,192,500 2,205,975 3,290,393 6,517,081 6,973,277 7,461,406 7,983,705 15,705,156NPV of TCLAT benefits to children 3,838,400 3,982,824 4,136,428 4,287,458 4,976,447 5,132,585 5,296,912 5,530,222 8,710,301Total assets to heirs 29,088,400 30,316,160 32,287,811 34,444,161 45,067,303 44,271,071 46,055,521 47,799,439 72,744,998 Page 55
  • CAPTIVE INSURANCE COMPANY DETAILS - PROPOSED PLANYEAR Current 2011 2012 2013 2017 2018 2019 2020 2030Balance SheetAssetsInitial Capitalization (non-deductible) 250,000 267,500 286,225 306,261 401,445 429,547 459,615 491,788 967,421Captive Insurance Company - 925,000 1,919,750 2,984,133 6,115,636 6,543,730 7,001,792 7,491,917 14,737,735 Total (Marketable Securities )* 250,000 1,192,500 2,205,975 3,290,393 6,517,081 6,973,277 7,461,406 7,983,705 15,705,156These are gross numbers subject to potential claims against the captive insurance company.* Assumes 7.0% annual growth on profits and reserves.Assets in Captive $ 250,000 $ 1,192,500 $ 2,205,975 $ 3,290,393 $ 6,517,081 $ 6,973,277 $ 7,461,406 $ 7,983,705 $ 15,705,156 Page 56
  • CAPTIVE INSURANCE COMPANY DETAILS - PROPOSED PLAN (Continued)CIC Cash Flow Current 2011 2012 2013 2017 2018 2019 2020 2030 Income Misc - - - - - - - - Premium Income 1,000,000 1,000,000 1,000,000 - - - - - Total Income 1,000,000 1,000,000 1,000,000 - - - - - Initial Captive Capitalization 250,000 - - - - - - - Expenses Captive Management Fees - (70,000) (70,000) - - - - - First Year Feasibility and Set Up (75,000) - - - - - - - Net Income (Cash Flow) 925,000 930,000 930,000 - - - - -Taxable Income Current 2011 2012 2013 2017 2018 2019 2020 2030 Dividend income (Marketable Sec.) - - - - - - - - Initial Captive Set up Fee (Amortized deduction) (15,000) (15,000) (15,000) - - - - - 831(b) Premium Exclusion (1,000,000) (1,000,000) (1,000,000) - - - - - Misc - - - - - - - - Taxable Income (1,015,000) (1,015,000) (1,015,000) - - - - - Page 57
  • NON-GRANTOR TRUST DETAILS - PROPOSED PLAN 11,100,001 12,321,001 13,676,311 20,761,603 18,811,602 19,752,182 20,739,792 11,100,000 12,321,000 13,676,310 20,761,602 19,212,427 15,196,782 16,030,070YEAR Current 2011 2012 2013 2017 2018 2019 2020 2030Trust Balance SheetBusiness, LLC Interests Sold for Note 5,000,000 5,550,000 6,160,500 6,838,155 10,380,801 9,606,214 7,598,391 8,015,035 14,013,385Seed Gift - Business, LLC Interests 5,000,000 5,550,000 6,160,500 6,838,155 10,380,801 9,606,214 7,598,391 8,015,035 14,013,385Proceeds from Investments, LLC Loan - 4,040,836 3,624,408 3,190,001 2,812,173 2,952,782 3,100,421 3,255,442 5,302,772Loan from Investments, LLC - (5,000,000) (5,000,000) (5,000,000) (5,000,000) (5,000,000) - - -Note payable to John (5,000,000) (5,000,000) (5,000,000) (5,000,000) (5,000,000) (5,000,000) (5,000,000) (5,000,000) (5,000,000)Net equity 5,000,000 5,140,836 5,945,408 6,866,311 13,573,775 12,165,209 13,297,203 14,285,512 28,329,542Trust Income Tax EstimationCaptive Premium Payments (1,015,000) (1,015,000) (1,015,000) - - - - -Business, LLC 2,000,000 2,220,000 2,464,200 3,740,829 - 384,249 303,936 529,173Cap Gains from Sale of Oil Trucking - - - - 6,500,001 - - -Earnings from reinvestment acct./Seed Gift - 80,817 72,488 50,847 56,243 59,056 62,008 101,005Note Interest Payment Deduction (193,000) (193,000) (193,000) (193,000) (193,000) (193,000) (193,000) (193,000)Total earnings 792,000 1,092,817 1,328,688 3,598,676 6,363,245 250,304 172,944 437,178Trust Cash FlowDistribution from Investments, LLC Loan - 618,470 615,627 - - 4,976,267 - -Cash flow from Business, LLC 1,000,000 1,220,000 1,464,200 3,740,829 20,761,603 384,249 303,936 529,173Reinvestment into Business, LLC 1 (1,100,000) (1,221,000) (1,355,310) (2,057,456) - - - -Loan from Investments, LLC 5,000,000 - - - - - - -Investments, LLC Loan Repayment (100,000) (100,000) (100,000) (100,000) (100,000) (5,100,000) - -Initial Captive Capitalization (250,000) - - - - - - -Cash flow from reinvestment acct./SeedGift - 80,817 72,488 50,847 56,243 59,056 62,008 101,005Installment Note payments to John (193,000) (193,000) (193,000) (193,000) (193,000) (193,000) (193,000) (193,000)Trust Income Taxes (276,165) (365,287) (464,005) (1,258,501) (1,272,419) (86,571) (59,495) (151,977)Insurance Premium (40,000) (40,000) (40,000) (40,000) (40,000) (40,000) (40,000) (40,000)Excess Cash 4,040,836 - - 142,719 19,212,427 - 73,449 245,2011 Assumes 55% of profits from Business, LLC are reinvested back into the business.GDOT InsuranceNet death benefit 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000All Pay Premium 40,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 Page 58
  • TESTAMENTARY CHARITABLE LEAD TRUST DETAILS - PROPOSED PLANYEAR Current 2011 2012 2013 2017 2018 2019 2020 2030Charitable Lead Annuity TrustBalance SheetTot. value of TCLAT assets 15,746,548 16,339,031 16,969,173 17,588,752 20,415,245 21,055,780 21,729,912 22,687,038 35,732,907Annual payment to charity if deathoccurs in the column year 844,912 876,703 910,515 943,760 1,095,421 1,129,790 1,165,962 1,217,318 1,917,320Benefits to CharityNPV of TCLAT income distributions* 15,746,548 16,339,031 16,969,173 17,588,752 20,415,245 21,055,780 21,729,912 22,687,038 35,732,907Total of TCLAT distributions* 21,122,811 21,917,581 22,762,870 23,593,989 27,385,516 28,244,745 29,149,042 30,432,955 47,933,008Benefits to ChildrenFuture Benefits to Heirs from TCLAT* 12,998,183 13,487,255 14,007,414 14,518,853 16,852,016 17,380,754 17,937,224 18,727,296 29,496,170NPV of benefits to children* 3,838,400 3,982,824 4,136,428 4,287,458 4,976,447 5,132,585 5,296,912 5,530,222 8,710,301Note: NPV of benefits to heirs assumes a 5% linear growth of TCLAT assets. A higher actual rate of growth wouldmean more money to the heirs while a lower actual rate of growth would mean less money to the heirs.*The values shown passing to charity and to heirs vary from year to year based on the projected size of your estate, and the applicable tax law. Page 59
  • BENEFITS TO THOMASON FAMILY CHARITY - PROPOSED PLANYEAR Current 2011 2012 2013 2017 2018 2019 2020 2030NPV of TCLAT income distributions 15,746,548 16,339,031 16,969,173 17,588,752 20,415,245 21,055,780 21,729,912 22,687,038 35,732,907Total benefits to foundation 15,746,548 16,339,031 16,969,173 17,588,752 20,415,245 21,055,780 21,729,912 22,687,038 35,732,907 Page 60
  • PLAN ASSUMPTIONS JOHN THOMASONThe plan is based on numerous assumptions. Important among these are the yield and growth assumptionscontained on the balance sheet in the Financial Analysis section. Other important assumptions are contained onthis Plan Assumptions page. Tax Rate Assumptions State Income Tax Rate 5.5% 7520 Rates Highest rate 2.9% May, 2010 Current rate 2.4% July, 2011 Lowest rate 2.4% July, 2011 Long Term AFR Rate 3.9% July, 2011 Salary and Other Earned Income Assumptions Annual increase in Johns earned income 0% Number of years Johns income is expected to continue 7 Lifestyle Need Assumptions Net annual outlay for Johns lifestyle needs, not including gifts or taxes $200,000 Annual cost of living increase used in the plan 3% Settlement and Administrative Expenses Fixed estate settlement costs $25,000 Variable estate settlement costs 1.00% (of assets) Page 61
  • DISCLAIMER AND DISCLOSURE JOHN THOMASONInKnowVision, LLC does not give accounting or investment advice to its clients. The effectiveness of any of the strategies described will dependon your individual situation and on a number of complex factors.You should consult with your other advisors on the accounting and investment implications of the proposed strategies before any strategy isimplemented.Any discussion in this presentation relating to tax, accounting, investments, regulatory, or legal matters is based on our understanding as of thedate of this presentation. Rules in these areas are constantly changing and are open to varying interpretations.Assumption Issues The plan involves numerous assumptions. While we believe that these assumptions are reasonable, it is important tounderstand that it is a virtual certainty that the actual results will differ from those illustrated. Returns on investment and performance offinancial products such as insurance can cause the results to vary. Changes in tax, trust or property laws can cause plan results to vary. Planimplementation that differs from that described in the plan will cause the results to vary. Provision of state law may cause the plan results tovary.Tax Opinions The IRS has recently issued new rules for tax practitioners regarding covered opinions, reliance opinions and marketed opinions.While this is an arcane area, suffice it to say that these opinions are often obtained by taxpayers for purposes of avoiding penalties. Theseopinions are obtained at substantial cost and after substantial legal analysis. If you believe that such an opinion would be helpful to you prior toentering into any of the transactions outlined in this plan, you should feel free do so.Be advised that nothing in this analysis should be construed by you, your advisors or any one else as a covered opinion, reliance opinion,marketed opinion or any other type of opinion regarding any of the transactions or outcomes outlined in this plan. Page 62
  • APPENDIX JOHN THOMASONMany of our clients like to read about some of the strategies that we have recommended. Both as further education and as areminder of the main points involved in the strategies.The appendix material that follows includes information about the planning strategies recommended. Not all strategies areincluded. Only those that likely require additional explanation.Naturally, we are always happy to answer your questions or review the details of a particular strategy with you at any time. Charitable Remainder Unitrust (CRT) - This trust allows an individual or couple to make a gift, or a series of gifts, normally of appreciated assets, receive a charitable income tax deduction for the present value of the gift and to receive an income stream of a percentage that is based on the value of the trust assets. All types of CRTs have a minimum payout percentage of 5%. The trust is based on the life expectancy of the grantor or a term of years no greater than twenty. When the last income beneficiary dies or at the end of the term, the remainder passes to the charitable beneficiary. TCLAT - A testamentary charitable lead annuity trust is established at the death of the grantor. It pays a fixed annuity percentage to charity for a period of time then the remaining assets are transferred to the grantor’s beneficiaries. Most TCLATs are structured to create a “zero” transfer tax and are often used to eliminate any estate tax that would be due from the grantor’s estate. Charitable Life Estate - Client makes a gift to a charity of his residence and retains all rights and obligations of property ownership for his life. Client receives an immediate charitable income tax deduction for the present value of the gift to charity. At death, the house passes to the designated charity and is removed from the estate of the donor. Private Foundations - A private foundation is a specific type of charity that is established and operated usually by one family. The entity can be a trust or a corporation and the family may have 100% control of the board, make all of the investment decisions and all charitable grants. Private foundations must distribute 5% of its assets annually. There are also strict guidelines as to what type of investments may be owned and there are special limitations as to the amount of charitable income tax deductions are available for contributions. Page 63
  • Family Charity Plan - Client establishes a family limited partnership that is designed to minimize the typical discounting thatis normally associated with partnership planning. Client funds the partnership and then donates the limited partnershipinterests to designated charities. Client receives a significant income tax deduction and maintains investment control overpartnership assets. Often client has a right to borrow from the partnership. Also, client generally makes an annualdistribution to the charities from the partnership, normally 1% of assets.Supporting Organizations (SOs) - SOs are similar to private foundations but are actually public charities that can beestablished by private families. Because they are technically public charities, the higher charitable income tax deductionrules for public charities apply. Unlike private foundations, however, SOs require that a private family may not haveabsolute control of the board. That is, if the board is to have 5 members, the family can only have a maximum of 2 of thosemembers. SOs are not required to pay excise taxes, nor are they required to distribute 5% of their assets annually. Instead,they must distribute 85% of their income.Bargain Sales - A bargain sale occurs when a donor transfers property to a charity for less than the full fair market value ofthe property or when the charity pays some portion of the value for property it receives. The donor only receives a taxdeduction for the contributed portion of the property.Charitable Remainder Annuity Trust (CRAT) - This trust allows an individual or couple to make a single gift, normally ofappreciated assets, receive a charitable income tax deduction for the present value of the gift and to receive an incomestream of a fixed percentage of the original value of the contribution of trust assets. The trust is based on the life expectancyof the grantor or a term of years no greater than twenty. When the last income beneficiary dies or at the end of the term, theremainder passes to the charitable beneficiary.Gift Annuity - A gift annuity is a form of a bargain sale. A donor transfers property to a charity in exchange for a fixedincome stream that will last for the life expectancy of the donor. A charitable income tax deduction for the present value ofthe gifted property is allowed. The charity is liable and responsible for the payment of the annuity income stream.Net Income with Makeup Unitrust (NIMCRUT) - This is a special type of charitable remainder unitrust (see above)wherein the trust distributes the “net income” that the trust assets earn within the trust. If the trust does not earn enoughincome to pay the stated income percentage payout, the trust creates an “IOU” account that it can pay at a later date whenthe assets earn more income. These trusts are often used when a donor has other income currently but would like incomelater such as during their retirement. Trust assets can be managed to produce income or not. Page 64
  • Flip Charitable Remainder Unitrust (Flip CRT) - This type of CRT operates like a NIMCRUT when it is originallyestablished, paying out only the income it earns at a set percentage. At some triggering event in the future, the FLIP CRTchanges character and operates like a standard CRT (SCRUT) whereby it pays out a fixed percentage of its annual valuation.This type of CRT is often used when a gift that produces little current income (such as land) is transferred before it is sold.Upon sale, the proceeds are reinvested and the CRT begins paying its regular percentage.Charitable Lead Unitrust (CLUT) - This trust operates very much like the CLAT. However, while the percentage payoutremains fixed, the trust’s distribution amount varies depending on the value of the trusts assets which are computedannually. Because of this, the CLUT cannot have a “zero” gift amount as there will always be some calculated remainder thatpasses to the heirs. CLUTs are often used for gifts to grandchildren or other “skip generations” because the generationskipping tax amount can be calculated when the trust is first established.Charitable Lead Annuity Trust (CLAT) - This trust distributes income to charity over the life of the donor or for a period ofyears. At the end of the trust term, the trust assets are either distributed back to the grantor or to heirs. These trusts areused to either transfer assets to heirs with little or no gift tax or to create a different way to make gifts if the grantor hasalready used significant charitable income tax deductions. CLATs have no minimum payout percentage.Donor Advised Funds (DAF) - A DAF is a special account established at a Community Foundation. It allows a donor tomake a gift of property without specifying the final charitable purpose for the gift. Donors often are allowed to maintainmoney management responsibility for the DAF and can also direct the Community Foundation as to where the charitablefunds are ultimately distributed. The Community Foundation is not technically bound to direct the funds to the donor’sselection but as a practical matter most follow the donor’s wishes. DAFs have no annual minimum requirement fordistribution and are usually inexpensive to establish.Limited Liability Company/Charitable Remainder Trust (LLC/CRT) - In this strategy a gift of appreciated property is madeto an LLC. The LLC then gifts the property to a CRT in exchange for the income interest. The LLC is then sold to a GrantorDeemed Owned Trust (GDOT) in exchange for a note. Because of the fact that the LLC only owns the income stream duefrom the CRT, and the LLC has restrictions on marketability and liquidity, the “discount” available for the sale to the GDOTshould be substantial.Family Limited Partnership (FLP) - FLPs are a form of business entity that can be utilized to facilitate the transfer of assets.Ownership interests are divided into General Partner (GP) and Limited Partner (LP) shares. GPs maintain control of theentity even though they may own a small percentage of the total FLP. LP interests have ownership but no control. Becausethe LPs have no control over their interests FLPs often receive significant valuation adjustments when valued by appraisers.This allows the LP units to be transferred or sold at less than their full monetary value. FLPs also enjoy strong creditorprotection and are therefore effective for family asset protection purposes. Page 65
  • Long Term Care Insurance (LTC) - This type of insurance is meant to protect families from the catastrophic costs of caredue to a prolonged illness. Coverage is usually provided as a “per day” cost and many policies feature various riders thatprotect against inflation. Coverage applies not only for nursing home and rehabilitation facilities but for home health carecosts as well. Policies can be structured so that they are paid for over a lifetime or for a period of years. Some policiesrefund the premiums that have been paid at the death of the insured. LTC is income tax deductible to C Corporations andowners of those corporations may “discriminate” as to which employees are covered.Walton Grantor Retained Annuity Trust (Walton GRAT) - In a typical GRAT assets are transferred to a trust and thegrantor of the trust receives an income stream for a period of years. What is left in the trust at the end of its term istransferred to beneficiaries, normally the grantor’s heirs. The normal structure of a GRAT is meant to use “leverage” toreduce or eliminate the taxable gift to the heirs form the GRAT. This type of normal GRAT causes all of the GRAT assets tobe included in the grantor’s estate if the grantor dies during the GRAT period. The Walton GRAT provides an exception tothis rule, thereby allowing GRAT payments to continue after death and the GRAT assets not reverting to the grantor.Revocable Living Trust (RLT) - A foundational document of most estate plans, the RLT is a trust that is established by anindividual for the purpose of holding and managing the assets of the individual. The trust is a non-entity for income taxpurposes. That is, the grantor of the trust is still responsible to report and pay the income tax due on any trust assets. RLTsare also effective in the event of a disability or incompetence of the grantor, in that they name a successor trustee who canstep in to the shoes of the grantor without a court proceeding. RLTs are often established in order for the grantor’s estate toavoid probate. Further, a properly drafted RLT can be utilized to take advantage of the estate exemption in order tominimize estate taxes.Preferred Limited Partnership (LP) - This type of LP creates two different classes of limited partner. LP units are allocatedbetween “common” and “preferred” classes. The common interests are generally entitled to receive any of the growthassociated with the underlying assets of the LP. The preferred receive a stated percentage income return, e.g. 5%. Becauseof the possible disparity of return between the two types of units often have different values when appraised. This allowsthe General Partner of the LP to make different decisions as to the ultimate disposition of the two types of interests. Thistype of LP can provide substantial planning leverage for the appropriate estate.Life Insurance - While life insurance has been available for a very long time it is often dismissed. However, properlystructured life insurance can add an element of safety and certainty to most estate plans. Life insurance death benefits aregenerally income tax free and policies that are properly owned outside of the estate can also be estate tax free. Manypolicies have guarantees that will keep the policy in force as long as premiums are paid in a timely fashion, regardless ofinterest rate or company mortality fluctuations. Page 66
  • Rent to Own - This strategy couples a short term Qualified Personal Residence Trust (QPRT) with an Irrevocable LifeInsurance Trust (ILIT). The ILIT is a beneficiary of the QPRT and at the termination of the QPRT term receives premiumpayments in the form of rental income. This allows the client to pay large insurance premiums without annual gifting,Crummey notices or income tax consequences.Life Settlements - This strategy involves the sale of a life insurance policy to an independent third party. There are manyreasons to consider this type of transaction. The client may no longer need the insurance; the policy may be in danger oflapsing while the client is unwilling or unable to make the necessary premium payments; or there may be newer, moreappropriate and cost effective insurance needed for the clients’ current circumstances.529 Plans - 529 Plans represent a special section of the tax code which has been enacted to encourage the funding of posthigh school education. Each state has its own plan but individuals may choose the plan of any state they wish to use. 529plans allow an individual to establish an investment account for themselves or for another person (normally children orgrandchildren). Investment returns grow on a tax free basis and, if utilized for post high school educational purposes,remain tax free. While the funds are generally out of the estate of the grantor of the plan, the grantor may take them back atany time. While they will have to pay income tax as well as a 10% penalty on the earnings, it is often reassuring to have theknowledge that the funds are retrievable in the event of an economic emergency. The law further allows the grantor tomake five years of gifts to the 529 plan in one year. That is, $60,000 can be deposited currently in a plan for the benefit ofanother, and then the grantor must wait until the sixth year to make any additional deposits.Family Limited Liability Company (FLLC) - Much like the FLP, a FLLC is a type of business entity that provides for thecentralized pooling and management of family assets. Owners of FLLC units are considered “members” and there is usually asingle “managing member”. FLLCs are a relatively new for of entity and there is less case law regarding their uses andnuances when compared to FLPs. However, many jurisdictions have passed favorable FLLC statutes and therefore the FLLCshould be carefully considered in the proper jurisdiction.Crummey Powers - Most traditional life insurance trusts contain what are known as “Crummey Powers” which grant thebeneficiaries of the trust the right to withdraw money that has been contributed to the trust (normally to pay insurancepremiums), for a period of time. This allows the contribution to be a gift of a “present interest” and therefore qualify for theapplication of the annual exclusion. The name “Crummey” power derives from the court case that originally challenged andwon on this principle.Jurisdictional Trusts - These trusts are normally established because of the favorable laws of a specific jurisdiction. Thesecould be any type of trust, revocable or irrevocable, grantor or non-grantor. What’s important is that the specific legalfoundation of the jurisdiction is favorable for the application sought. These could be state specific, i. e. Delaware for assetprotection or Dynasty provision, or could even be international such as Cook Islands or Nevis for asset protection. Page 67
  • Succession Planning - This is the process by which the owner of a closely held business determines who will take over thebusiness and how and when the transition will take place. While not necessarily a codified estate planning “technique” abusiness without an organized succession plan will be more likely to fail and have to be sold or liquidated. The economicresult to the family may be different than planned for or anticipated.Grantor Retained Annuity Trust (GRAT) - The GRAT transaction entails the transfer of assets to a trust whereby thegrantor retains an income from the trust for a period of years and the remainder transfers to beneficiaries at the end of thetrust term. The “remainder” is calculated using IRS tables and is considered a gift to the remainder beneficiaries. Therefore,many GRATs are structured to produce a “zero” gift and hope to take advantage of the possible arbitrage of the return of theassets in the GRAT compared to the IRS rates utilized to calculate the trust remainder. The disadvantage of the regular GRATtransaction is that if the grantor dies during the trust period, all of the assets in the GRAT are included back in the grantorsestate.Sale for Installment Note - This transaction is normally coupled with other techniques to improve the results. Often afamily will use an FLP or FLLP and sell interests that have been appraised at a reduced value because of lack of liquidity andmarketability. The buyer is often a trust for the beneficiaries, which purchases the discounted assets for the installmentnote. While the note is in the estate of the seller, it is usually of less value than the assets that have been sold. The note canbe structured to be paid as “interest only” or it may be amortized.Gifting - A simple way to transfer assets to beneficiaries. An individual may currently gift $11,000 of property to any otherindividual, annually ($12,000 beginning in 2006). Further, every individual can currently give away up to $1 million ofassets during their lifetime without incurring gift taxes. Making gifts of property that is discounted in some way can beadvantageous in transferring more than the statutory amount.Annuity Withdrawal - Often families ignore the funds that clients have in commercial annuities. Since funds areaccumulating on a tax-deferred basis, this is often a logical approach. However, since annuities remain in the estate of theowner and are therefore subject to estate tax and income in respect of a decedent tax, it is often advisable to begin asystematic program of annuity withdrawal. Frequently the after-tax proceeds of the withdrawal can be utilized to subsidizelifestyle or to purchase life insurance to replace the dollars that would be lost to the double taxation of the annuity.Dynasty Trust - This type of trust allows assets that are contributed to the trust to remain in the trust for multiplegenerations. Because of this provision, the trust assets will pass outside of the estate tax system and will also be protectedfrom the claims of a trust beneficiary’s creditors. This type of irrevocable trust must be established in a jurisdiction thatallows multi-generational trusts. Page 68
  • Premium Finance - When purchasing life insurance, many families face the possibility of making taxable gifts because theamount of the premium exceeds the amount of annual gifting available to the insured. Using the option of premiumfinancing may alleviate this problem. Funds are provided by a third party lender who pays the premium. The insured usuallypays only the interest on the borrowed funds while the principal of the loan accumulates and is often repaid from theinsurance proceeds at the insured’s death. While complicated, premium financing can be an interesting solution for fundinglarge policies.Buy-Sell Agreements - This type of contract is normally associated with the owners of a closely business to allow for thedisability, abandonment of the business, or untimely death of any of the owners. The agreements describe the provisions bywhich an owner’s share of the business will be redeemed. Buy-sells can be funded with disability and life insurance or theymay be unfunded and, therefore, rely on the cash flow of the business to fund the buy out. Providing liquidity for the estateof the business owner is often the reason for the formation and execution of a buy-sell.Irrevocable Life Insurance Trust (ILIT) - In many estate plans, it is best to own life insurance outside of the taxable estate.The ILIT is the most common and flexible form of trust to accomplish this function. The ILIT will be the owner andbeneficiary of one or more life insurance policies and will obligated to pay the premiums, collect the proceeds at death anddistribute the funds to beneficiaries per the provisions of the trust. This is a good way to engage professional managementin the management and oversight of the trust funds. ILITs may be established as Dynasty Trusts, if so desired.Asset Protection - This is a broad category of planning which may involve one or more different strategies. Each of thetechniques seeks to provide insulate assets from the attack of creditors. Various trusts, FLPs, FLLCs and other entities maybe considered for asset protection. Further, there are choices of jurisdiction both domestic and foreign that may providefavorable environments for asset protection. Those in high risk profession or those with high risk assets generally fit theprofile for implementing asset protection strategies.Intra Family Loans - A simple solution that allows family members to make loans at the current Applicable Federal Rate(AFR), this strategy allows for possible arbitrage gains when the AFR is low relative to long term investment results.Furthermore, it is often possible for discounts to apply to the value of the notes in the event of the death of the lender.Corporate Recapitalization - Many closely held companies only have one class of stock, known as common voting stock.When considering options for estate planning, the closely held company stock often represents a major portion of theestate. In order to facilitate transfer while retaining control of the company, it is possible to “recapitalize” the company byredeeming the outstanding shares and issuing new shares which are divided between “voting” and “non-voting” shares. Thenon-voting shares are then transferred by sale or gift and because of their non-voting status appraisals often reflect a greatlyreduced value for these shares. Recapitalizations are available to S corporations as well as C corporations. Page 69
  • Self Canceling Installment Note (SCIN) - Like other installment notes, the SCIN originates when assets are sold. As thename implies the SCIN obligation is cancelled when the obligation is fully paid or at the death of the seller. Because of theself-canceling feature of the SCIN, the seller receives a “premium” amount that is higher than a normal installmentobligation. The premium is reflected in one of two ways; either more principal is added to the balance or a higher (thancurrent federal tables) interest rate is applied to the obligation. SCINs may be effective in circumstances where the seller isnot expected to live to their IRS computed life expectancy.Grantor Deemed Owned Trust (GDOT) - This type of trust has several unique properties that make it a very powerfulestate planning tool. First, when assets are transferred to the trust either by gift or by sale, they are removed from the estateof the grantor. Second, the assets in the GDOT remain income taxable to the grantor of the trust. While this may not seemlike a positive attribute, the grantor’s recognition and payment of the income taxes essentially allows the assets in theGDOT to grow free of income taxes outside of the estate. This can greatly increase the ultimate value of the assetstransferred to the trust.Offshore Captive Planning - Business owners often have risks that are either under-insured or are too expensive to insure.Those who have excess taxable income may choose to establish their own insurance entity, know as a “Captive.” These aremost done in international jurisdictions since the tax laws favor this type of arrangement. These structures are very complexand require specialized planning but can also provide very favorable income and estate tax benefits.Qualified Personal Residence Trust (QPRT) - This technique involves transferring a residence by gift to a trust for a periodof years. Normally, a gift tax return is filed for the year that the QPRT is funded. At the end of the trust period, the residencebecomes the property of the beneficiaries of the trust. Because the gift is made currently and vests in the beneficiary at alater date, there is a discount on the value of the transfer which is calculated utilizing IRS tables. One risk of the QPRT is ifthe transferor dies during the QPRT term, the house reverts to the estate of the transferor. After the QPRT terminates, thetransferor should pay rent to the transferees as in any other commercial transaction.Leveraged Roth Conversions - Under certain circumstances it is possible to convert a traditional IRA account to a RothIRA. This may be an effective strategy, though it requires the payment of income taxes on the converted amount. Use ofborrowed funds to pay taxes can make this a very strong strategy.Employee Stock Ownership Plans (ESOP) - Closely held businesses often have no clear exit strategy. An ESOP can providea ready market since the ESOP effectively sells a portion of the company stock to a qualified plan which must include theemployees of the company. The owner may receive property which will allow a diversification of his assets that have beenconcentrated in their own company. ESOPs take many forms and are often complex transactions. Page 70
  • 412(i) - This type of defined benefit pension plan is structured to allow the investments in the plan to be either lifeinsurance and/or commercial annuities. Normally these products are designed to produce a low guaranteed rate of returnwhich causes the annual contribution and, therefore, the income tax deduction to the participants in the plan, to berelatively high. 412(i) may be appropriate for an older business owner who has few employees.IRA Maximizer - This strategy is for those individuals who have significant balance in their IRA (or other qualified plan) andwho do not need the funds to live on. Normally, the IRA invests all or some of its assets in a newly formed family limitedpartnership (flp) and the flp invests all or some of its assets in a restricted management account (rma). The result of thetransaction is that there will be a reduction in appraised value of the account because of the illiquid nature of the rma andthe flp. By structuring the transaction properly, the IRA owner may reduce income taxes on required minimum distributionsand estate taxes because of the reduction in apprised value.Limited Partnership Owned Life Insurance - An alternative to owning life insurance in an irrevocable life insurance trust(ILIT), families often use a Limited Partnership. This is normally done as one step in a transaction whereby the limitedpartnership units will be sold or otherwise transferred out of the estate of the insured. Further, there are usually other assetscontributed to the partnership that will fund the insurance premiums. Done properly, the life insurance death benefit canremain outside of the estate of the insured while some degree of control through the control granted by retaining theGeneral Partner interest.Family Bank - a combination of strategies that may include an LLC and/or a multi-generational irrevocable trust. Thepurpose of the family bank is to create an entity that will allow several generations of family members to have access towealth for various purposes but also with a great degree of monitoring and supervision. A family bank may lend money to anheir to purchase a home or to start a business but will first assess the appropriateness of the transaction against a set ofguidelines that have been drafted into the formation documents. Page 71