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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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