Note: This example creates a $432,202 transferable gift. Most likely this will not create an out-of-pocket expense, as you each currently get $1.0 million of estate/gift tax exemption from the Federal government. Note: The annual payment can come from liquid assets you put in the GRAT, when you initially form the GRAT, or it might come from dividend distributions related to the privately held stock
Notes: Balloon payment due at the end of year 9 – no pre-payment penalty Liquidity to make the balloon payment will come from future sale of business Parent/owner can make annual gifts to note purchaser to help him/her afford the annual interest amount due No gift tax All future appreciation on privately held company stock moved downstream
The presentation that this example came from then went on to say that, Cuban acquired, with his good fortune, the following assets/toys: A $41 million Gulf-Stream V, A 24,000 sq. foot bachelor pad where he holds wiffle ball tournaments in the chandelier ballroom, and He became the owner of the NBA Dallas Mavericks.
Unlocking the value of your biggest asset… your business Robert Katz, CFP, Principal Todd Speed, CFA, Portfolio Manager
What are the goals of someone holding a large block of a single low cost basis stock?
Transfer a portion of the value to one’s beneficiaries
A GRAT is an irrevocable trust into which an individual, a Grantor, places stock or other assets into a trust for a fixed period of time while retaining the right to receive the principal and interest rate back in the form of annuity payments, “A Second Paycheck.”
What assets are best to put into a GRAT?:
Shares of a business before it is sold or goes public
Real Estate that can be appraised today at a low value
Enter into a 3-year “costless” collar for his Yahoo stock.
It is estimated that Cuban received a floor of $85 a share and a cap of $205 per share.
Initially, when Yahoo soared to $237 per share in January of 2000, Cuban’s collar did not appear to be a wise move, but in light of Yahoo’s subsequent fall in price to roughly $13 a share, the collar may have saved Cuban over $1 billion dollars.
Lenk, on paper, made the Forbes list of the 100 wealthiest technology executives.
But, Mr. Lenk believed in his company so much he hardly cashed in any stock. His optimism cost him $600 million in paper wealth as his online retail company descended into bankruptcy a little more than a year after its market peak.
Lenk, did nothing to protect the downside and his eToys stock value plummeted to about $500,000.
Last known to be the President of Gap Inc. Direct, the company’s online division… and most of you have never heard of him.
How many of you have heard of Toby Lenk, the eToys CEO who did the opposite of Mark Cuban? eToys.com
This type of fund, albeit sometimes hard to find, offers diversification with no initial capital gains tax due upon admittance into the fund.
The fund manager coordinates together individuals that have large concentrations in a single stock.
Participant selection is done by the fund manager whose goal is to create a diversified portfolio, comprised of many industries with various size capitalization holdings.
Accordingly to avoid capital gains taxes, these funds typically limit redemption’s in the first 5-7 years of the fund. It is important that you and your investment advisor carefully review the exchange fund holdings to ensure the quality of the portfolio is consistent with the client risk-reward profile.
No upfront premium will be paid by you the investor.
2. The investor creates downside protection below the Put strike (floor) and gives up appreciation potential above the call strike (ceiling), effectively creating what is known as a “collar” around the stock.
3. Both the floor and ceiling can be set at almost any point, but are generally priced so that the transaction is costless to you the investor.
4. This strategy is useful to protect the value of the stock you received but may have temporary selling restrictions in place and you do not want to pay a premium for that protection.
Strategies that consider the use of options Zero Cost Collar Downsize protection below Put Strike Price Forgone upside above Call Strike Price Portfolio Value Stock Price
Enables the investor to reduce downside/concentration risk in the stock.
The investor will receive upfront liquidity with no restrictions in order to help the investor diversify.
The investor is willing to relinquish appreciation of the stock above the cap price and would like to maintain ownership, voting rights and current dividends.
Summary of Publicly Held Strategies * Investors should consult their own tax and legal advisors regarding structures NO NO YES (Payable to Investor) YES (Payable to Broker) NO Premium YES YES YES YES NO Deferral of Tax Event* YES (with Reinvestment) NO (Yes with Broker Financing and Reinvestment) NO NO (Yes with Financing and Reinvestment) YES (with reinvestment) Diversification YES (Imbedded in structure) YES (with Broker Financing) YES (Capped) YES (with Broker Financing) YES Liquidity YES (Capped) YES (Capped) YES (Capped) YES (Unlimited) NO Upside Potential YES YES NO YES YES Downside Protection Prepaid Variable Delivery Forward Zero Cost Collar Covered Call Protective Put Outright Sale Goal