1. EXIT STRATEGIES FOR BUSINESSES
July 20, 2018
Presented by
Lynn Ames

2. WHO WE ARE
• 31-year operating history serving as fiduciary advisor to individual clients,
families, and businesses
• Ranked #1 registered investment advisory firm in the U.S.*
• Company is owned by employees
• More than $278 billion in client assets under advisement
• 98% client retention (average since 2007)
• The CAPTRUST Community Foundation supports more than 75 national
organizations that benefit children annually
*Source: FA Magazine, 2016, 2017, and 2018 2

3. YOUR ADVISOR Lynn spent seven years with Deloitte before becoming
director of tax for Ballard Medical Products, a mid-size public
company that was very active with mergers and acquisitions
during his tenure. After assisting Ballard through a sale of its
business, he joined Ernst & Young where he became tax
partner and ran the tax practice for 13 years. During that
time, Lynn worked with many of Utah’s largest companies.
Additionally, he has assisted many ultra-high-
net-wealth clients purchase and exit businesses. Lynn is a
firm believer that structuring tax-efficient transactions puts
money in the hands of bright, visionary entrepreneurs who
can use those funds to create great businesses, new jobs,
and a stronger economy.
Lynn Ames, CPA
Financial Advisor 3

4. • Qualified small business stock:
PLANNING FOR AN EXIT
Our experienced CPAs provide unique insights into powerful tax planning strategies
including the:
• Charitable gifting:
• Donor advised fund (DAF)
• Charitable remainder trust
• Qualified small business stock:
• Exemption – Section 1202
• Rollover – Section 1045
• Substituted basis 4

5. DONOR ADVISED FUND
• Non profit fund administered by an independent third party
• Charitable contribution tax deduction for appreciated property at fair market value
regardless of basis
• Upon sale of appreciated asset, funds are invested and generate a tax-free return
• Determine which charities receive donations and when as long as the donee is a
qualified 501(c)(3) entity
• All funds and earnings are eventually paid to qualified charities 5

6. USE OF A CHARITABLE REMAINDER TRUST Annual gross income
Gift from trust income
You/spouse
Gift of property or trust
Charitable donation
Irrevocable life
insurance trust
Charitable
remainder trust
At death
IRS
Estate tax
Remainder to
charity of choice at death
Insurance
proceeds replace charitable gift
Charity
Your heirs 6

7. USE OF A CHARITABLE REMAINDER TRUST
• The initial gift to a Charitable Remainder Trust (CRT) is divided into an income interest
and a remainder interest. You receive a tax deduction for the fair market value of the remainder interest
• You receive income for life or a set number of years
• Fund is invested and grows tax-free
• You determine the charity that receives the remainder interest 7

8. SMALL BUSINESS STOCK
• There is favorable tax treatment afforded to taxpayers, other than corporations, that
invest in qualified small business corporations. Must be a Subchapter C Corporation and can’t be an S Corporation
• There is both a gain exclusion and a gain rollover provision
• A qualified small business has the following requirements:
• Stock held by investor must be originally issued from the corporation—does not have to be founder stock
• The fair market value at the time of issuance must be less than $50 million
• Must be a qualified business—generally operating businesses not engaged in services, banking and finance, farming, oil and gas or mining, and real estate
• Stock must be held for 5 years 8

9. SMALL BUSINESS STOCK – EXCLUSION
• Under section the exclusion is a percentage of the gain as follows:
• Before – 50%
• Between and – 75%
• After – 100%
• Gain exclusion is limited to the larger of $10 million or 10 times the basis in the stock at the time of issuance.
• One combined exclusion for husband and wife.
• There can be planning to stack more exclusions with next generation.
• Under new tax law, more corporations will elect C Corporation status because of favorable tax rate. Therefore, section 1202 will have increased relevance in tax and exit planning going forward. 9

10. SMALL BUSINESS STOCK – ROLLOVER
• Section 1045 allows a tax-free rollover to another qualifying small business
• A stock must meet all the section 1202 requirements except holding period
• A stock only needs to be held for six months to qualify for rollover
• A rollover must be completed within 60 days of sale of qualified small business
• New stock gets carry-over tax basis
• Can be coupled with the exclusion under section 1202 10

11. PARTNERSHIP PLANNING
• One strategy is centered around a tax law concept called substituted basis
• For partnerships, (or limited liability companies taxed as partnerships), this concept
provides an opportunity to be strategic about which assets remain in the partnership
and which assets are distributed to exiting partners 11

12. SIMPLE ILLUSTRATION OF SUBSTITUTED BASIS IN PARTNERSHIP TAX
732 - Basis of distributed property other than money
(b) Distributions in liquidation
The basis of property (other than money) distributed by a partnership to a partner in liquidation of the partner’s interest shall be an amount equal to the adjusted basis of such partner’s interest in the partnership reduced by any money distributed in the same transaction.
Note: the term “money” here refers to cash or marketable securities. 12

13. NAVIGATING PARTNERSHIP BASIS RULES•
IRC Section 732(b) requires that, in the case of a liquidating distribution of property other than cash or
marketable securities to a partner in a partnership, the partner must substitute the basis in his partnership interest into the property received
This may cause a high-basis asset that is used in a partnership liquidating distribution to lose substantial basis if the liquidated partner has low basis in his/her partnership interest
The partnership rules allow the distributing partnership to receive a basis step-up equal to the basis step- down suffered by the liquidated partner
This step-up in basis is allocated among the remaining assets in the partnership
Sometimes, taxpayers can be strategic about which assets are used to liquidate a partner and which assets remain in the partnership • • • 13

14. SUBSTITUTED BASIS IN PARTNERSHIP TAX
1-2-3
Partnership
Partner 3
FMV: $10M Outside Basis in Partnership: $0
Asset B: FMV: $10M
INSIDE BASIS: $0
Asset Y: FMV $10M Basis $10M
Asset U: FMV $1M Basis $1M
Partner 2
Partner 1
Partner 3
Asset Y
Asset B
Asset U 14

15. SUBSTITUTED BASIS IN PARTNERSHIP TAX3 is
redeemed
out
of the partnership by
receiving
asset Y
Asset B: FMV $10M BASIS $10M
Asset Y: FMV $10M BASIS $0
Asset U: FMV $1M Basis $1M
Notes:
1- Asset B has receives a step-up in basis because Asset Y received a step- down in basis in the redemption – 734(b)
2- Must have two partners remaining after the redemption
Partner 2
Partner 3
Partner 1
Asset Y
Asset B
Asset U 15

16. SUBSTITUTED BASIS IN PARTNERSHIP TAX
sells
Asset B for
$10M
and no
gain
Sold to
third party
Asset B: FMV $10M
SUBSTITUTED BASIS $10M
Asset Y: FMV $10M BASIS $0
Asset U: FMV $1M Basis $1M
Note: Because Asset B now has a basis equal to the FMV of the property, there is no gain on the sale of Asset B
Partner 2
Asset B
Partner 3
Partner 1
Asset Y
Asset U 16

17. ADDITIONAL INFORMATION ABOUT THE STRATEGY
• This strategy relies on tax laws that have been in the tax code for decades.
• There are a number of specific rules that need to be carefully addressed in order to
successfully implement the strategy.
• Depending on the facts, there can be necessary holding periods to properly implement
the strategy.
CAPTRUST Financial Advisors does not render legal, accounting, or tax advice. It has been prepared solely for informational purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Any performance data quoted represents past performance. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Past performance is no guarantee of future results. 17