EFTA02702733

2011 CONFIDENTIAL Preferred Partnership Freeze This material is not intended for external distribution, nor is it intended as an offer or solicitation to purchase or sell any security, investment or service and anyone who distributes this material in such manner will be in violation of JPMorgan Private Bank policy and may be subject to disciplinary action up to and including possible termination. The sole purpose of this material is to inform internal personnel within the JPMorgan Private Bank J.P.Morgan 0 EFTA_R1_02076440 EFTA02702733 Please keep in mind This material is intended to help you understand the tax and financial consequences of the concepts and strategies discussed here in very general terms. However, the strategies found herein often involve complex tax and legal issues. Only your own attorney and other tax advisors can help you consider whether the ideas illustrated here are appropriate for your individual circumstances. JPMorgan Chase & Co. does not practice law, and does not give tax, accounting or legal advice. We will, however, be pleased to consult with you and your legal and tax advisors as you move forward with your own planning. CONFIDENTIAL J.P.Morgan 1 EFTA_R1_02076441 EFTA02702734 Preferred Partnership Freeze (PPF) is for investors interested in enhanced wealth transfer opportunities using a Delaware Statutory Trust Purpose: to "freeze" the value of assets that will be included in the senior generation's estate and shift the excess appreciation to the junior generation(s) without additional transfer tax. • It enables investors to transfer to beneficiaries anticipated appreciation in a tax-efficient manner while retaining a large portion of the investment and a fixed return • Investment is divided into Managing Units, Preferred Units and Residual Units • Preferred Units represent majority of initial asset value and carry a fixed (cumulative, non-compounding) rate of return • Residual Units represent balance of initial asset value plus anticipated appreciation in excess of the preferred return • Residual Units are gifted and/or sold to beneficiaries CONFIDENTIAL J.P.Morgan 2 EFTA_R1_02076442 EFTA02702735 Structure of Preferred Partnership Freeze O Senior family members transfer assets into a Delaware Statutory Trust (DST) 0 DST issues multiple classes of units: • Managing Units: general management control and collective 1% economic interest • Preferred Units and Residual Units: limited management rights and collective remaining 99% economic interest - Preferred Units provide a fixed, cumulative annual return to senior family members equal to the annual preferred payment on the Preferred Units (can be deferred for 4 years) and a fixed value on liquidation. Preferred Units provide greater security but limit participation in appreciation of the assets - Residual Units provide excess appreciation after satisfying Managing Units' 1% interest, and the Preferred Units preferred return. Residual Units provide less security but accrue the capital, income and appreciation beyond the fixed return to Preferred Units • J.P.Morgan Trust Company of Delaware acts as administrative trustee Senior family members initially receive all DST units for their contribution O Assets a LLI a LL J.P.Morgan Managing Units Managing Units: 1% Preferred Units Preferred Units: 79% Residual Units Residual Units: 20% J.P.Morgan Trust Company of Delaware (Trustee) ' Two members will initially capitalize DST to secure partnership tax treatment 2 Member 1 receives 0.5% voting managing units plus all preferred units and residual; member 2 retains the other 0.5% voting managing unit. 3 EFTA_R1_02076443 EFTA02702736 Structure of Preferred Partnership Freeze O To maximize the benefits of the PPF, senior family members may gift or sell the Residual Units at discounted value' to beneficiaries outright or to trust for their benefit; can also gift or sell Preferred Units over time CONFIDENTIAL C • J.P.Morgan Trust Company of Delaware administers distribution and manages investments subject to Managing Unit holders. • Investment Manager directs Trustee as to investment of assets. • Managing Unit holders control important voting decisions. Preferred and Residual Unit holders have limited voting rights. Appoints Investment Managers and Trustee J.P.Morgan Senior family members Managing Units Managing Units: 1% Investment Manager Preferred I I Preferred Payments Units DST Preferred Units: 79% Residual Units: 20% J.P.Morgan Trust Company of Delaware (Trustee) Directs trustee ' 1.P. Morgan can provide names for a professional appraisal O Residual Units Beneficiaries' Trust 4 EFTA_R1_02076444 EFTA02702737 PPF capitalizes on Delaware's favorable laws and continuity of asset management across generations... • Limited liability for all Unit holders, even if they participate in management • Confidentiality of all Unit holders is preserved as only the name of the trust and the name and address of the Delaware trustee need to be disclosed • Dissolution does not necessarily occur upon the death, incapacity or bankruptcy of a unit holder • Flexibility to react to changes in regulatory or tax laws to facilitate the changing needs of trust participants • Trustee is allowed broad investment authority to employ Modern Portfolio Theory and flexibility of delegating investment decisions to other advisors CONFIDENTIAL J.P.Morgan 5 EFTA_R1_02076445 EFTA02702738 ...and J.P.Morgan's ability to offer bundled delivery makes the PPF a cost-efficient solution • The formation of a preferred partnership freeze is simple and economical — established by filing a Certificate of Trust with the Delaware Secretary of State • Investment management costs can be reduced through economies of scale • J.P.Morgan's fiduciary system provides the following: - documentation of the value of units transferred among family members — attendance to tax compliance — maintenance of the records of the preferred partnership freeze strategy to preserve its integrity for tax purposes as a separate legal entity CONFIDENTIAL J.P.Morgan 6 EFTA_R1_02076446 EFTA02702739 Delaware administration responsibilities • Account set-up • Ongoing communication — Administrative matters including record keeping and market value statements — Fiduciary oversight for regulatory and planning considerations • Account administration — Investment maintenance (i.e. subscription agreements and offering memoranda) • Ongoing communication with Managing Unit holders and investment manager — Custody including safekeeping, income collection, and optional trading platform • Responsibility for liquidations, distributions, and withdrawals — Preferred payments, tax distributions, redemptions • Executing distribution transactions including deferral of preferred payments • Evaluating distribution/redemption requests from Unit holders • Determining amounts and timing of all distributions • Obtaining valuations to support distributions, as necessary • Complying with Internal Revenue Code Section 2701 rules and provisions of estate freeze strategy documents • Cash-flow analysis for preferred payments • Maintaining required income/principal ledgers • Delegated responsibility for tax compliance — Compilation of partnership return work papers — Review and execution of partnership returns and K-1s — Evaluation of filing positions including Section 754 elections _, < _ i— Z ua 0 u-z 0 Li J.P.Morgan 7 EFTA_R1_02076447 EFTA02702740 Transfer tax considerations • Internal Revenue Code Section 2701 describes and sanctions the estate freeze strategy • Gift tax value of Residual Units must be ≥ 10% of the capital account funding value of estate freeze strategy • Discounts may apply to funding, calculation of the effective preferred rate and valuation of Residual Units • Appreciation in estate freeze assets exceeding effective preferred payment rate accrues to benefit of Residual Unit holders without causing additional gift or estate tax • Preferred Payments: - Based on prevailing "Market Rate" of return, typically determined by valuation professional's appraisal and may be deferred for 4 years on a rolling basis — Nominal preferred rate may be reduced by discounted funding, deferral of preferred payments and benefit of all capital (including common units) at work to produce amount necessary to pay this lower effective rate • PPF may be less likely to be subject to IRS scrutiny than standard family limited partnerships. — Reinforced by the independent Trustee's control over distributions 0 LL J.P.Morgan 8 EFTA_R1_02076448 EFTA02702741 Income tax considerations • PPF: Delaware Statutory Trust classified as partnership for income tax purposes • Contributions: generally in-kind contributions do not cause immediate gain recognition - Exceptions may apply, such as: • Investment company rules - diversification • Property contribution subject to liabilities assumed by partnership - Built-in gains: subsequent partnership sale allocations of pre-contribution gain to contributor • Basis (if tax free contribution): — Partnership's basis in assets same as contributor's basis — Partner's basis equals cash plus adjusted basis of contributed assets • Allocations: - Profits: First to Common Managing Units and Residual Units allocable for prior aggregate losses, second to Preferred Units for prior aggregate losses, third to Managing Units percentage interest and Preferred Units' cumulative return, and fourth to Residual Units - Losses: First to Common Managing Units percentage interest and Common Residual Units until reduced to zero then second to Preferred Units until reduced to zero • Preferred payments: made only from net cumulative tax profits from inception, so Preferred Units have taxable income up to nominal return when partnership has taxable income - Not guaranteed payments which are required regardless of income and which are taxed as ordinary income with partnership realized events when satisfied in-kind - Non-taxable in-kind distributions or borrowed cash can be used to satisfy timely preferred payments • Distributions: - Cash: distribution taxable typically as capital gains only if exceeds basis - Security: distribution generally not taxable event • Exception - Built-in gains within 7 years of contribution unless contributor reacquires back originally contributed property - Non-liquidating distribution: partnership inside basis allocation Liquidating distribution: partner's outside basis allocation; generally non taxable event unless cash exceeds outside basis - Disguised sale presumption: taxable event presumption for distributions within two years of contribution LL • Mergers with Family Limited Partnerships ▪ J.P.Morgan 9 EFTA_R1_02076449 EFTA02702742 Assumptions for PPF analysis • $16,000,000 in funding • 15% valuation discount on asset due to illiquidity and lack of marketability • 1%/79%/20% Managing/Preferred/Residual Unit split • 15% estimated total return' • Estimated 7.5% mandatory fixed annual payments attributable to Preferred Units2 • Residual Units gifted3 to beneficiaries' trust at discounted value: - 10% illiquidity discount on overall value of DST - 30% additional discount on value of Residual Units • Undiscounted value of gift: $3,200,000; discounted value: $2,720,000 • Client has already utilized lifetime gift exemption • Gift tax rate (2011): 35% • Estate tax rate (2021): 55% • 4 year deferral of mandatory fixed annual payments to Preferred Units • Grantor retains income tax liability due to grantor trust status in beneficiaries' trust3 a LL J.P.Morgan Note: Numbers are for illustrative purposes only. 'Return does not consider yield versus appreciation since income tax is not considered. Return estimate is for illustrative purposes only. Actual return will vary. 'Effective hurdle rate: 2.2%; 7.5% preferred coupon rate reduced by 15% discount on underlying asset, plus benefit of additional residual and managing value to fund coupon payments, benefit of deferral periods, less effect of cost of gift tax. 'Units can be gifted or sold. GST exemption can be allocated in gifting. Please read "Important Information" in Appendix. 10 EFTA_R1_02076450 EFTA02702743 Compared to doing nothing, PPF can increase wealth to beneficiaries with little upfront cost Cash flow example: 516,000,000 assets, 15% return on assets a LL Scenario 1 Scenario 2: Preferred Partnership Senior Family Members Beneficiaries Year Hold asset Cost of gift tax 79% Fixed annual Payments Preferred 1% Voting Manakin, 20% Residual 0 Discounted assets $13,600,000 $10,744,000 $136.000 52,720,000 Gift tax incurred upon gift ($599,760) 10 Value of assets upon liquidation 64,728,924 (2,426,364) 10,380,770 10,744,000 543,482 43,060,672 Estate tax (35,600,908) 1,334,500 (5,709,424) (5,909,200) (298,915) Net wealth to beneficiaries 29,128,016 (1,091.864) 4,671,347 4,834,800 244,567 43,060,672 8,658,850 43,060,672 Total value to beneficiaries $29,128,016 $51,719,522 Value added by Preferred Partnership Freeze 522,591,506 Assumptions. Pre.funding economic value . S16,000,000 Discount on DST . 10%. Discount on residual. 30%. Discount on assetscontributed . 1S%. Preferred . 79%, Ressclual. 20%, Managing . 1%, Ftxed annual payments. 75!,; Return on asses 8 fixed annual payment. Years of payout deferral . 4; 2011 Gift tax rate . 35%. 2021 Estate tax rate . SS'. Note AbOve example is for illustrative 0W00%esonly These materials should not be construed as providing legal, tn. Or accounting advice Numbers have been rounded for convenience, are only estimates for illustrative purposes and should not be relied upon. Actual return will vary J.P.Morgan 11 EFTA_R1_02076451 EFTA02702744 Economic flows of PPF LLI a LL Example Pre-funding economic value Discounted FMV of capital accounts Discount on assets contributed Preferred units percentage Managing units percentage Residual units percentage Term of strategy Fixed annual payment Annual payout amount Years of payment deferral Total return of asset 16,000,000 13,600,000 15% 79% 1% 20% 10 7.5% 805.800 4 15.00% Beginning Appreciation Distributions of year End of Year Accrued 79% 1% 20% ear Total Mane! in, Preferred • ents Preferred Man • i • Residual DST Total 0 1 2 3 4 6 7 8 9 10 13,600,000 16,000,000 18,760,000 21.934,000 25,584,100 28,967,776 32,859,003 37,333,914 42,480,061 48,398,131 2,400,000 2,760,000 3,174,000 3,650,100 4,197,615 4,705,166 5,288,850 5,960,087 6,732,009 7,619,720 (8,139) (805,800) (8,139) (805,800) (8,139) (805,800) (8,139) (805,800) (8,139) (805,800) (40,697) (4,029,000) 805,800 1,611,600 2,417,400 3,223,200 3,223,200 3,223,200 3,223,200 3,223,200 3,223,200 10,744,000 10,744,000 10,744,000 10,744,000 10,744,000 10,744,000 10,744,000 10,744,000 10,744,000 10,744,000 10,744,000 136,000 160,000 187,600 219,340 255,841 289.678 328,590 373,339 424,801 483,981 543,482 2,720,000 4,290,200 6,216,800 8,553,260 11,361,059 14,710,898 18,563,213 22,993,374 28,088,061 33,946,950 43,060,672 13,600,000 16,000,000 18,760,000 21,934,000 25,584,100 28,967,776 32,859,003 37,333,914 42,480,061 48,398,131 54,348,154 J.P.Morgan Note: Preferred payments can be deferred for 4 years Assumes assets are liquidated in year 10 Grantor fixed annual payments 813,939 1,749,970 2,826,405 4,064,305 5,487,890 10,380,770 Total 13,600,000 16,000,000 18,760,000 21,934,000 25,584,100 29,781,715 34,608,972 40,160,318 46,544,366 53,886,021 64,728,924 12 EFTA_R1_02076452 EFTA02702745 Compared to a FLP/LLC, PPF can increase wealth to beneficiaries with little upfront cost Cash flow example: $16,000,000 assets, 15% return on assets Year Scenario 1 Scenario 2: FLP/LLC Senior Family Members Beneficiaries Hold asset Cost of gift tax 80% Voting managing / Non-voting 20Y0 Non-voting 0 Discounted assets $13,600,000 $10,880,000 $2,720,000 Gift tax incurred upon gift ($599,760) 10 Value of assets upon liquidation 64,728,924 (2,426,364) 51,783,139 12,945,785 Estate tax (35,600,908) 1,334,500 (28,480,726) Net wealth to beneficiaries 29,128,016 (1,091,864) 23,302,413 12,945,785 22,210,549 12,945,785 Total value to beneficiaries $29,128,016 $35,156,334 CONFIDENTIAL Value added by FLP/LLC Value added by PPF Difference $6,028,318 $22,591,506 $16,563,188 Assumptions: Pre-funding economic value = S16,000,000; Discount on FLP/LLC = 10%; Discount on non-voting units = 30%; Discount on assets contributed = 15%; Non-voting to beneficiaries = 20%; Non-voting remaining with senior generation = 79%; Voting managing = 1%; Return on assets = 15%; 2011 Gift tax rate = 35%; 2021 Estate tax rate = SS% Note: Above example is for illustrative purposes only. These materials should not be construed as providing legal, tax, or accounting advice. Numbers have been rounded for convenience, are only estimates for illustrative purposes and should not be relied upon. Actual return will vary. J.P.Morgan 13 EFTA_R1_02076453 EFTA02702746 Direct gift vs. gift of non-voting FLP/LLC units vs. gift of residual units Residual Units capture not only the growth on the Residual Units, but also the appreciation of the entire entity above the required fixed annual payments - equivalent to an additional 16.6% return above the 15% return Value to beneficiaries in year 10: Direct gift of $3.2MM vs. Gift of $3.2MM FLP/LLC units vs. Gift of $3.2MM residual units Value to beneficiaries in 000's CONFIDENTIAL 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 , J.P.Morgan Direct Gift G ft of non-voting FLPILLC units Gift of Residual Units Year 10 Direct gift: 53.2MM growing to 512.9MM Ins appreciated cost of gift tax of 52.0MM FLPALC: $3.2MM growing to 512.9MM less appreciated cost of gift tax of $1.1MM Gift of residual: 53.2MM growing to S03.1MM less appreciated cost of gift tax of 51.1MM Assumes 15% return. Return estimate is for illustrative purposes only. Actual return will vary. 14 EFTA_R 1_02076454 EFTA02702747 PPF shifts capital account appreciation to residual units over time DNFIDENTIAL Managing 1% 50.1MM $2.7MM 510.7MM Preferred 790/0 Residual 20% Total value of entity: $13.6MM Year 0 J.P.Morgan Preferred 20% Managing 1% 50.5MM 10.7MM 543.1MM Liquidation Value: $54.3MM Year 10 Residual 79% Assumptions: $16MM funding; 15% valuation discount on asset due to illiquidity and lack of marketability; 1%/79%/20% Managing/Preferred/Residual Unit split; 15% estimated total return; Estimated 7.5% mandatory fixed annual payments attributable to Preferred Units; Residual Units gifted to beneficiaries' trust at discounted value: 10% illiquidity discount on overall value of DST, 30% additional discount on value of Residual Units; 4 year deferral of mandatory fixed annual payments to Preferred Units Return estimates are for illustrative purposes only. Actual return will vary. 15 EFTA_R1_02076455 EFTA02702748 What will the assets have to return to ensure that wealth transfer goals are achieved? Not the preferred rate of return CONFIDENTIAL 8.00% 7.00% - 6.00% 5.00% 4.00% - 3.00% 2.00% 1.00% 0.00% J.P.Morgan / SO'o Fixed preferred payment rate Effective return required for PPF to be effectivei Why? • Discount on asset • Discount on DST and Residual Units • 4-year deferral • Benefit of growth from 100% of value of the entity ' 7.5% preferred coupon rate reduced by benefit of residual units value (in addition to preferred and managing units) to fund coupon payments, payment deferral periods, and 15% discount on assets contributed. Therefore, effective hurdle rate is the return required to produce ending residual value of 52.72MM (breakeven) r $599,760 (gift tax). 16 EFTA_R1_02076456 EFTA02702749 PPF exponentially benefits from incremental investment performance over time CONFIDENTIAL The value at death' of PPF versus holding the assets. Assumes various return rates: 5%, 8%, 11%, 15%2 Value to beneficiaries in 000's 55,000 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 I 5% 8% 11% /I VI 1 15% ■ Freeze /g/ No Freeze J.P.Morgan 5% 8% el 15% 8% I 15% % 8% 1 4 7 10 Time (years) I Assumes assets are liquidated. I Return estimates are for illustrative purposes only. Actual return will vary. 15% 17 EFTA_R1_02076457 EFTA02702750 Key Benefits Non-economic • Single upfront transfer eliminating need for annual transfers in the future (i.e. cascading GRATs that continually "re-GRAT" • Consolidated management in Delaware • Strong legal certainty • Beneficial definition of security law "Qualified Purchaser" vs. GRAT • Leverage other strategies with additional discount afforded structure Economic • No leakage first 4 years, minimal leakage thereafter • May benefit from valuation discounts • GST allocation with gift of residual • If appreciation not as expected, can redeem preferred, locking in value or dissolve and recapitalize • Hurdle rate may be lower than AFR and 7520 rates per valuation discount and benefit of preferred payments deferral Key Risks • IRS may arrive at different valuation conclusions • Underlying asset could experience losses or earn less than the preferred coupon • Tax law changes may affect potential benefits of structure 0 LL J.P.Morgan 18 EFTA_R1_02076458 EFTA02702751 Creative gifts of Residual Units may further enhance the PPF • Gifts to grantor trusts — investor remains responsible for income taxes of trust, allowing the trust principal to grow tax-free — trust provisions may provide for asset substitution, allowing investor to transfer high basis property/cash to trust in exchange for the low basis property in order to receive benefit of stepped up estate tax basis • Gifts to generation-skipping trusts — value passes beyond children's generation without second level transfer taxes — Perpetual Delaware Trust compounds estate tax free for successive generations • Other wealth transfer strategies may be integrated with the PPF CONFIDENTIAL J.P.Morgan 19 EFTA_R1_02076459 EFTA02702752 Assumptions for integration of other wealth transfer strategies with PPF Assume same underlying asset Structure specific assumptions PPF assumptions Hold PPF with GRAT PPF with Cascading GRAT PPF with Sale to IDGT $16,000,000 in funding; 10 year term 15% return on asset* Estate tax rate: 55% No income tax is considered. Grantor retains income tax liability. Assume 15% discount on underlying asset 53,200,000 FMV residual units in funding; 10 year term Taxable value: S1,071,000 GRAT is zeroed out 15% return on asset* Estate tax rate: SS % No income tax is considered. Grantor retains income tax liability. Assume 15% discount on underlying asset 53,200,000 FMV residual units in funding; 10 year term Taxable value: S1,071,000 GRATs are zeroed out 15% return on asset* Estate tax rate: 55 % No income tax is considered. Grantor retains income tax liability. Assume 15% discount on underlying asset $1,557,818 note; 10 year term FMV of sale: $2,909,094 Gift made of discounted assets to trust for coverage: 5155,782; FMV: $290,909. 15% return on asset* Gift tax rate: 35%; Estate tax rate: 55% No income tax is considered. Grantor retains income tax liability. Assume 15% discount on underlying asset 7520 rate: 3.0% 20% Annuity escalation 7520 rate: 3.0% 20% Annuity escalation Long-term MR rate: 4.3% 1%/79%/20% managing/preferred/ residual unit split 7.5% fixed annual payments to preferred units (based on 79% of discounted funding) 10% illiquidity discount on total holdings; 30% additional discount on residual 4 year deferral of payments on preferred units 1%/79%/20% managing/preferred/ residual unit split 7.5% fixed annual payments to preferred units (based on 79% of discounted funding) 10% illiquidity discount on total holdings; 30% additional discount on residual 4 year deferral of payments on preferred units J. P Morgan Return estimates are for illustrative purposes only. Actual return will vary. 1 %/79%/20% managing/preferred/ residual unit split 7.5% fixed annual payments to preferred units (based on 79% of discounted funding) 10% illiquidity discount on total holdings; 30% additional discount on residual 4 year deferral of payments on preferred units 20 EFTA_R1_02076460 EFTA02702753 Value to beneficiaries Value to beneficiaries with different strategies assuming 15% return Value to beneficiaries in 000's CONFIDENTIAL 55,000 50,000 45,000 40,000 35,000 30,000 25,000 20,000 J.P.Morgan u Hold *Annual payments inaind. 49,815 PPF/GRAT' 50,132 •PPFICascading GRAT* ■ PPFISale to IDGT* Year 10 21 EFTA_R1_02076461 EFTA02702754 Residual units fund a GRAT Cash flow example: $16,000,000 assets, 15% return on assets Scenario 1 Scenario 2: Estate Freeze CONFIDENTIAL Year 0 Discounted assets Gift tax incurred upon gift Hold asset $13,600,000 Senior Family Members Beneficiaries 79% 1% 20%• Fixed annual payments and GRAT payments Preferred 510,744,000 10 Value of assets upon liquidation 64,728,924 15,883,009 10,744,000 Estate tax (35,600,908) (8,735,655) (5,909,200) Net wealth to beneficiaries 29,128,016 7,147,354 4,834,800 219,807 37,613,455 J --..--- 12,201,961 ,,,,,,,,,37,613,455 Total value to beneficiaries $29,128,016 $49,815,416 Voting Managing Residual $136,000 $2,720,000 488,459 37,613,455 (268,653) Value added by Estate Freeze $20,687,400 Assumptions: Pre-funding economic value • 516.000.000; Discount on DST • 10%; Discount on residual. 30%; Discount on assets contributed 15%; Preferred • 79%; Residual • 20%; Managing • 1%; 7520 rate: 3%; Fixed preferred yield = 7.5%; Return on assets & fixed annual payments = 15%; Years of payout deferral = 4; 2011 Gift tax rate = 35%; 2021 Estate tax rate = 55% Note: Above example is for illustrative purposes only. These materials should not be construed as providing legal, tax, or accounting advice. Numbers have been rounded for convenience, are only estimates for illustrative purposes and should not be relied upon. Actual return will vary. J.P.Morgan 22 EFTA_R1_02076462 EFTA02702755 Residual units fund a Cascading GRAT Cash flow example: 516,000,000 assets, 15% return on assets Year Scenario 1 Scenario 2: Estate Freeze Hold asset Senior Family Members Beneficiaries Fixed annual payments and GRAT payments 79% Preferred 1% Voting Managing 20% Residual 0 Discounted assets $13,600,000 510,744,000 5136,000 $2,720,000 Gift tax incurred upon gift 10 Value of assets upon liquidation 64,728,924 15,299,969 10,744,000 494,290 38,190,665 Estate tax (35,600,908) (8,414,983) (5,909,200) (271,859) Net wealth to beneficiaries 29,128,016 6,884,986 4,834,800 222,430 38,190,665 -v- 11,942,216 38,190,665 Total value value to beneficiaries $29,128,016 $50,132,881 Value added by Estate Freeze $21,004,866 Assumptions: Pre-funding economic value = S16,000,000; Discount on DST = 10%; Discount on residual = 30%; Discount on assets contributed = 15%; Preferred = 79%; Residual = 20%; Managing = 1%; 7520 rate: 3%; Fixed preferred yield = 7.5%; Return on assets & fixed annual payments = 15%; Years of payout deferral = 4; 2011 Gift tax rate = 35%; 2021 Estate tax rate = 55% Note: Above example is for illustrative purposes only. These materials should not be construed as providing legal, tax, or accounting advice. Numbers have been rounded for convenience, are only estimates for illustrative purposes and should not be relied upon. Actual return will vary. CONFIDENTIAL J.P.Morgan 23 EFTA_R1_02076463 EFTA02702756 Residual units sold to IDGT Cash flow example: $16,000,000 assets, 15% return on assets Year Scenario 1 Scenario 2: Preferred Partnership Fr & Sell Residual Units to IDGT Hold asset Senior Family Members Beneficiaries Cost of gift tax Fixed annual 79% payments. interest & balloon payments Preferred 1% Voting Managing 20% Residual 0 Discounted assets 513,600,000 510,744,000 5136,000 52,720,000 Gift tax incurred upon gift ($54,524) 10 Value of assets upon liquidation 64,728,924 (220,579) 13,328,130 10,744,000 514,008 40,142,785 Estate tax (35,600,908) 121,318 (7,330,472) (5,909,200) (282,704) Net wealth to beneficiaries 29,128,016 (99,260) 5,997,659 4,834,800 231,304 40,142,785 10,964,502 40,142,785 Total value to beneficiaries 529,128,016 $51,107,287 DNFIDENTIAL Value added by Preferred Partnerdilp Reese $21,979,272 Assumptions Pre-funding economic value • 516.000000; Discount on DST . 10%. Discount on resclum. 30%, Discount on assets contributed . 15%. Preferred . 79%; Residual. 20%; Managing . 1%, APR rate .4 3%. Fixed annual payment • 7 5%. Return on assets a fixed annual payment. 15%, Years of payout deferral • 4.2011 Gift tax rate. 35%. 2021 Estate tax rate. 55% Note Above example is for llluwatrve purposes Only TheSe MateridlithOuld not be construed as providing legal, tax, Or accounting advice Numbers nave been rounded for convenience, are only estimatesfor illustative purposes and SAOuld not be relied upon Actual return will vary J.P.Morgan 24 EFTA_R1_02076464 EFTA02702757 Key considerations z a Preferred Partnership Freeze Preferred Partnership Freeze with Grantor Retained Annuity Trust Preferred Partnership Freeze with Sale to Intentionally Defective Grantor Trust Initial tax cost Return to grantor (assume growth of reinvested amounts) Investment rate of return necessary to succeed Valuation Timing & duration of payments Allocation of GST exemption Loss or "waste" of gift tax or GST exemptions (or taxes paid) if assets underperform Mortality risk Grantor's control LL J.P.Moraan No gift on creation if comply with §2701; but 10% minimum Residual Units Preferred payments Market rate for similar preferred interests Gift on creation if preferred payment rate < market rate or if valuation of assets are adjusted. 4-year grace period for annual payments. Duration: lifetime. Yes, if GST exempt trust or skip person holds Residual Units Yes No inclusion in taxable estate of transferred Units Grantor appoints/removes and can be investment manager, and appoints independent trustee. No gift on creation Annuity payments (calculated to return GRAT principal + *7520 rate of return) *7520 rate at time of creation of GRAT No valuation risk because regulations allow formulas for annuity to self-adjust 20% annual increase allowed, payment within 105 days. Duration: GRAT term. No None Inclusion in taxable estate if grantor dies before GRAT term ends Grantor can be trustee of GRAT but should not control assets after end of GRAT term Initial gift of 10% or more Interest + completed principal payments on note Applicable federal rate at time of sale for duration of note Additional gifts if valuation of assets are adjusted Flexible interest/principal payments, but must decide at inception. Duration: term of note. Yes, if purchaser is GST exempt trust Yes Law is unclear regarding estate and income tax Grantor should not act as trustee of trust 25 EFTA_R1_02076465 EFTA02702758 Important information CONFIDENTIAL IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with JPMorgan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S. tax- related penalties. 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