Personal Wealth Issues in an IPO
TA X C O S T S A N D L O N G - T E R M G O A L S
“What matters is not what you make, it’s what you keep.” That cliché may be especially applicable to business transactions, where the paper value of a deal can diminish significantly before the business owner actually is able to capitalize on his wealth. Luckily, planning in connection with a transaction can preserve value and greatly reduce the bite which income, gift, and estate taxes take from the proceeds.
In all cases, early planning can pay huge dividends. Opportunities to reduce tax costs tend to diminish as a deal progresses toward closing. One of the most frequent questions we hear is: “When does it make sense to begin the planning process?” In virtually every case the answer is: “Right now.”
Although tax considerations may be upper-most in the owner’s mind, there should also be due consideration for long-term personal and family goals. Many of the tools used in the planning process involve trusts or other legal entities which can last for years, and in some cases lifetimes. How these entities will accomplish the family’s overall goals and execute their personal values (including, importantly, philanthropic goals) will be of prime importance to the family and the success of a wealth transfer strategy. When business owners are engaged in a transaction, attention typically focuses on the issues involving the business itself. In an initial public offering (an “IPO”), matters of valuation, negotiation of terms, due diligence, regulatory issues, and the miscellaneous problems that must be resolved before closing dominate the agenda. These transactions also create a number of issues and opportunities relating to the personal wealth of the owner, and taking personal objectives into account should be a fundamental part of any transaction. Proper planning can accomplish these goals without slowing the transaction — and, in fact, can enhance overall transaction value.
Often an initial public offering (an “IPO”) is called a “liquidity event,” as it creates a market for the owner’s shares. But the liquidity opportunity is not immediate; in most cases sales will not occur for months, if not years, after the IPO. Yet planning in such cases remains an important part of the process. The way in which personal and business interests intersect, and the optimal structure, will vary with the form of the transaction and the goals of the owner. There is no standard approach that fits all occasions. Successful results come from integrating the business strategy and deal structure with the owner’s personal considerations.
An IPO may be the most important wealth creation event in a person’s lifetime, but important personal considerations often take a backseat in the IPO process.
Planning in connection with the transaction can preserve the wealth produced in the IPO by taking advantage of tax-saving opportunities and setting the stage for subsequent liquidity and diversification.
In particular, many business owners wonder about the effect of leaving substantial wealth to their children. Successful wealth transfer involves not just tax savings, but structuring wealth so that it preserves family values. In addition, preserving flexibility is key to a successful strategy. Tying up control of an entity can impede the handling of the business, or make it difficult to respond as the tax environment may change in the future. The considerations involved in that decision are many and complex. But a number of tools exist to accomplish the result the family intends; the difficult part is making the choices.
Because wealth transfer issues involve important questions regarding the long-term disposition of assets and the way in which the family will come into wealth, wealth transfer choices should not be made lightly. Important decisions about how to transfer wealth to heirs should not be made during the hurly-burly of an IPO road show. Once the owner develops a strategy, the appropriate vehicles can be funded at almost any time, (even until the eleventh hour). The timing of the transfers may, however, affect the success of the strategy. In addition to taking advantage of valuation opportunities, beginning the process early provides the time to consider carefully issues that could affect a family for decades to come.
I N T E G R AT I N G P E R S O N A L P L A N N I N G W I T H T H E T R A N S A C T I O N S T R U C T U R E
In considering tax issues, owners should plan both for the income tax — which includes capital gains — and the estate tax. The combination of those taxes (including, for many people, state taxes) can cut out a very large slice of a family’s wealth. Depending on the type of transaction involved, either or both of those tax systems may dictate what steps owners take to maximize their wealth.
VA L U AT I O N A N D T H E I M P O R TA N C E O F P L A N N I N G E A R LY
In concept, gift and estate taxation is simple. Transfers of wealth beyond specified exemption amounts are taxed (currently at a maximum federal rate of 46%;1state taxes may also apply), and the tax is based on the value of the property transferred, after taking certain exemptions into account. The focus of much planning in the context of a business transaction is to take advantage of attractive valuation opportunities before the transaction, increasing the ability to leave incremental wealth to family members. Often the ability to claim, and support, valuation discounts is an integral part of a family’s wealth transfer strategy.
1 The federal estate tax rate is scheduled to decline to 45% through 2009. The estate tax rate in 2010 is currently scheduled to be
zero, but in 2011 rates will revert back to pre-2001 levels (maximum rate of 55%) unless Congress acts in the meantime. The estate tax reform debate is ongoing in Congress, but the long-term future of the estate tax remains uncertain.
Funding appropriate wealth transfer vehicles early, while assets have a lower valuation, can increase the success of the strategy.
Exemption amounts.Individuals can transfer a portion of their wealth free of tax. An individual can transfer up to $12,000 ($24,000 for a married couple) to any number of recipients each year without gift tax; in addition, he or she can transfer a total of $1 million during his or her lifetime without incurring a gift tax. At death, in 2006 a total of $2 million per individual2(reduced to the extent the decedent used his or her $1 million lifetime exemption equivalent) can pass without tax.
Because valuation of a business can be substantially lower before a transaction occurs, that period offers a number of planning opportunities. It may be an opportune time to exercise stock options, particularly where the exercise cost (and tax cost) is low. It may also be a chance to transfer wealth to younger generations of the family at a minimal transfer tax cost. By using exemption amounts and “leveraged” gifting strategies (discussed in more depth below) that in effect transfer appreciation to family members, in the right circumstances business owners can transfer substantial wealth free of tax. Basing the gifts on the lower pre-transaction value can be advantageous.
Owners need to be aware of some competing considerations. If taxes were the only consideration, obtaining the lowest possible value for the company would provide the optimal result. But valuation is also critical in some other areas — not least of which involves presenting the company to investors or buyers on favorable terms. Particularly in the context of an initial public offering, valuation considerations can be crucial. Pre-IPO companies have long been sensitive to the need to make reasonable determinations of the company’s value when granting stock options to employees. Granting a stock option, or another type of equity award, at a discounted price gives rise to the so-called “cheap stock” issue, causing the company to record additional compensation expense.
Recently, section 409A of the Internal Revenue Code has caused an unhappy stir in the venture capital and growth company community. Under recently proposed regulations, granting stock options at a discount to current value is treated as a currently taxable event when the options vest. The employee would have compensation income, and the company would be required to report the income (and to withhold taxes). Under the regulations, if a company believes that it may go public within a 12-month period, establishing the fair market value of common stock will be possible only by getting an appraisal from an outside firm. Because the stakes are increasingly high, the valuation issues are receiving a great deal of scrutiny from investors and founders.
The decisions made regarding valuation have a direct impact on the business owners. While we think it is crucial to take advantage of favorable valuation opportunities,
2 The federal estate tax applicable exemption equivalent amount is scheduled to increase to $3.5 million per person through 2009.
The estate tax rate in 2010 is currently scheduled to be zero, but in 2011 rates and the estate tax applicable exemption equivalent amount will revert back to pre-2001 levels (federal estate tax applicable exemption equivalent amount of $1 million per person plus applicable inflation adjustments) unless Congress acts in the meantime.
Exemption amounts and “leveraged” gifting strategies can be used to transfer future appreciation to family members.
the owner also needs to be aware of how valuation will affect the company in a number of areas.
T H E I N I T I A L P U B L I C O F F E R I N G
A corporate IPO presents some of the best, and most easily realized, opportunities to accomplish personal goals. Through a number of techniques, many of which are not very complex, owners can implement a very effective wealth transfer strategy and can position themselves for long-term investment management.
Pre-IPO valuation. Effective wealth transfer planning can be done even before an IPO
becomes a definite possibility. Even a relatively short time before an IPO, a company’s stock may be valued at a significant discount to the eventual IPO price. Anecdotal evidence suggests that in a typical situation, a company expecting to go public in three months might be discounted by about 30 percent from the public market price.3
Even after the IPO, corporate insiders will face a number of restrictions on sales of shares, which will tend to further discount the fair market value of the stock. Early planning is optimal, but those who find themselves late in the process may still find opportunities.
Wealth transfer planning.Owners who wish to transfer wealth to their family have a number of tools at their disposal. All involve making gifts to younger generations, typically in trust. The gifts can take a number of forms, depending on the family’s net worth, the amount to be transferred, and the timing of the IPO.
Gifts of shares. The simplest and most direct approach is to transfer shares to family members, typically in trust for the benefit of younger beneficiaries or those not in a position to manage assets effectively. As long as the gift is within the applicable exemption equivalent amounts, the gift will not cause a gift tax. Generally, the gift amount is measured by the fair market value of stock transferred to the trust at the time of the gift. Using the exemption amounts to fund gifts can be an effective tool. The shares them-selves leave the owner’s estate, and any future appreciation in the stock accrues for the benefit of younger generations. Making gifts early, when the chance for future appreciation is greatest, can produce the biggest wealth transfer benefit (and starts the statute of limitations running, reducing the chance of a valuation challenge by the IRS).
“Leveraged” gifts. For various reasons owners may not wish to use the $1 million per spouse that can pass free of gift tax to cover pre-IPO gifts. They may already have used the credit, or wish to preserve it for other wealth transfer uses. In other situations, an
3 Source: FMV Opinions, Inc. The valuation figures in this paper are estimates based on general observations, not a survey of specific
transactions. The actual discount applicable to a given company will depend on facts relating to that business and market conditions at the time.
Valuation of the business and its equity typically increases as the IPO nears, but attractive opportunities for gifting may exist after the transaction as well.
Using the lifetime exemption equivalent to transfer shares to family members can be an effective tool.
owner’s net worth may be so large that a $1 million gift doesn’t reduce the taxable estate by a meaningful amount. In those situations, “leveraged” gifts can accomplish significant wealth transfer without use of exemption amounts.
The concept of leveraged gifts is similar to the use of leverage in business transactions. By retaining some portion of the gift, the owner reduces the amount transferred (the “equity” value) (and therefore his or her gift tax exposure). If the value of the property increases, the “equity” value of the gift accrues for the benefit of family members. The greater the appreciation, the more value transfers to younger generations. There are several ways to accomplish such a transfer:
• GRATs (Grantor Retained Annuity Trusts)– A GRAT is a trust to which the owner
transfers assets in exchange for an annuity payable over a specific period of time.4 Frequently, the amount of the annuity is calculated so that the present value of the annuity equals the value of the property placed in trust (and therefore there is no gift tax due). The present value calculation is based on IRS prevailing interest rates. If the stock transferred appreciates in excess of the annuity amount, the excess remains for trust beneficiaries (typically children or other family members of the donor) and has been transferred free of gift tax.
• Sales to “defective” grantor trusts– In this transaction, a trust for the benefit of family members, possibly including grandchildren or more remote descendants, pur-chases shares from the owner for fair market value. As payment the trust issues the donor a note bearing a specified interest rate. The trust is structured as a “defective” grantor trust, so that for income tax purposes the original shareholder is still treated as owning the asset sold to the trust. Consequently the payment of interest and prin-cipal on the note is not taxable. As long as the interest rate is at least equal to prevail-ing rates as published by the IRS, the transaction is not a gift (because the trust has paid full market value for the shares). Again, if the stock appreciates beyond the debt payments (interest and principal) owed to the owner, the excess remains in the trust. Typically, advisors recommend that the “defective” grantor trust contain assets in addition to those purchased (so that the trust has a meaningful equity value). With both the “defective” grantor trust and the GRAT, the creator of the trust contin-ues to pay any income or capital gains taxes attributable to the trust. That allows the full pretax value of trust assets to build for beneficiaries, while depleting the owner’s estate by the amount of the taxes paid. The “grantor trust” can also be terminated, in which case the trust (or beneficiaries) and not the grantor becomes responsible for income taxes.
4 In some cases, shareholders use “family partnerships” to hold stock and other assets, and contribute units in those partnerships to
the GRAT. Use of family partnerships raises other issues and will require an annual valuation to determine the amount payable under the annuity.
With a leveraged gift, the greater the appreciation, the more value transfers to the recipients.
Either strategy has advantages, and the specific approach used will depend on the situation and the judgment of the owner and his or her advisors. But the pre-IPO situation can be an ideal time to implement a leveraged gifting strategy; the increase in value resulting from public market valuations can produce some very significant wealth transfer.
Stock option issues. Compensatory stock options may be a significant asset for owners and executives, and they pose some particular issues in the context of an IPO. Although wealth transfer is a consideration in dealing with options, managing the income tax consequences of exercise and eventual liquidity is often the major issue facing option holders.
“Nonqualified” options.When an executive exercises nonqualified options, the “spread” between the stock’s fair market value and the exercise price is treated as compensation income. The spread will be taxed at the highest marginal rate (currently 35% federally), and is also subject to employment taxes and withholding. (The income will also appear on Form W-2.) If the executive holds the stock acquired, his holding period starts the day after the date of exercise. Like an outright stock purchase, any gain or loss after the exercise of the option is treated as either short-term or long-term capital, dependent upon the holding period.
Because the option exercise results in a significant cash outlay — payment of the exer-cise price as well as the income tax on the spread — most executives of public compa-nies choose to sell shares immediately after exercise. Although exercising and holding stock for more than one year holds the promise of long-term capital gain treatment (currently, a maximum federal tax rate of 15 percent), there are potential drawbacks:
• The concentrated market risk involved
• The opportunity cost of paying taxes
• Paying the strike price out of other assets
These complexities usually lead to an immediate sale of the stock.
The situation may, however, be different for employees of private companies that are considering an IPO. Because the public market valuation is typically higher than the company’s value while privately held, there is likely to be significant appreciation in connection with the IPO. Consequently, the potential benefits of a long-term capital gain treatment may merit the cash outlay required to hold the stock. Also, strike prices for private companies tend to be lower, placing less of a strain on assets
an executive would need to liquidate to pay the initial tax and purchase the stock.
The income tax implications for stock options can be complex, but planning opportunities may exist.
Incentive stock options (ISOs).ISOs do not produce compensation income upon exercise, and if the executive meets certain holding period requirements the entire gain on the position — the difference between the sale price and the option exercise price — is long-term capital gain. But the ISO benefit is treated as a “preference” item that can subject executives to the alternative minimum tax (the “AMT”), which complicates the option planning process greatly.
Example: John Donne is a California resident and an executive at Stuart Corpora-tion, with $200,000 in regular compensation. He exercises 20,000 ISOs with a strike price of $10 when the stock is trading at $25 per share. The ISO spread of $300,000 ($500,000 market value of position minus $200,000 price to exercise) is not subject to regular tax. But the option spread increases his AMT income and he is liable for over $27,000 in AMT (regular tax of $159,000, and total AMT of about $186,500).5 Although the executive may later be able to claim a credit for the AMT paid, the amount of the credit and the time when it is available will depend on income and deductions in later tax years.
ISO rules require that the employee sell stock more than two years after the date of the option grant and one year after the date of exercise. Failure to observe those holding period rules results in a “disqualifying disposition”, in which case the ISO is taxable, essentially, as a nonqualified option.
As with nonqualified options, the pretransaction period may provide an opportunity to plan with ISOs. Particularly in the case of an IPO, where the stock value may be expected to increase significantly, exercising options before the transaction may enable investors to acquire stock with minimal AMT or other tax consequences, and to accel-erate the time when the investor is free to sell the stock. Investors need to be cautious in exercising options, and to act only after receiving advice on the tax consequences of the exercise.
Wealth transfer considerations. Gifting strategies with options involve a number of complexities not associated with outright share ownership. For one thing, by their terms ISOs must be “nontransferable”. Accordingly, any gifting opportunities are limit-ed to nonqualifilimit-ed options. And even with nonqualifilimit-ed options, the terms of a given company’s option plan may prohibit transfers of the option.
It is important to remember that a gift of a nonqualified stock option does not change income tax treatment. If an optionee transfers a stock option and the recipient exercises it, the income associated with the exercise remains taxable to the donor. The IRS takes the
5 The example assumes a regular federal tax rate of 35%, an AMT rate of 28%, and a California rate of 9.3%. It assumes the state
tax is fully deductible for purposes of the regular tax calculation. The example is intended merely as an illustration, not a calculation of actual tax liability. Clients are urged to consult their own tax advisors regarding the consequences of exercising nonqualified options and ISOs.
Exercising ISOs may trigger the AMT.
view that because the option grant is a form of compensation, the option holder should not be able to shift resulting compensation income to another person. As a result, the recipient would keep the entire pretax spread on the option, with the original owner paying tax. That result may serve important estate planning goals — depleting the owner’s estate while providing additional value to the younger generation that received the gift. But it will be necessary to plan for the liquidity needed to pay resulting taxes.
Vesting requirements may also limit gifting opportunities with stock options. The IRS has ruled that a gift of unvested property takes effect when the restrictions lapse, rather than when the gift actually occurs. Because the option value may be substantially greater at that later point, the amount of the gift could exceed applicable exemptions, resulting in gift tax. Accordingly, option holders should take extreme care in considering gifts of stock options.
P O S T- T R A N S A C T I O N I S S U E S : B A L A N C I N G L I Q U I D I T Y, TA X C O S T, A N D L E G A L C O N S I D E R AT I O N S
After an IPO or stock acquisition, the executive often holds stock or options with a value greatly in excess of their tax basis. The primary investment consideration is then how to manage the equity position, which may represent the executive’s major financial asset. The diversification and risk analysis has to take into consideration the legal constraints on sale, as well as the tax cost of selling.
Restrictions on sale after an IPO. Even after the underwriters’ lock-up period expires, executives are not necessarily free to sell shares. Stock that is “restricted” under Rule 144 can be sold only in prescribed amounts, which vary depending on the number of shares outstanding and the trading volume. Corporate “insiders” — generally defined as officers, directors, or 10 percent shareholders of the company — are also subject to the “short-swing profits” rule, which forces sellers to disgorge profits from a sale occurring within six months of a purchase of the stock. And executives who are subject to the company’s policy on insider trading will be able to sell only in approved “window” periods. As a result, executives will need to structure liquidation strategies carefully.
10b5-1 plans: An important planning tool.Relying on window periods to sell shares
can be a problem for executives. The market prices available at the time may not be advantageous; there may be a number of sellers at the time, depressing the market; or the executive may, through his activities at the company, be aware of nonpublic information that makes a sale impossible.
Selling shares under Rule 10b5-1 is an important tool that can help address those issues. The executive adopts a selling program during a window period, at a time when he is not in possession of material nonpublic information. The plan specifies a formula for selling
Gifting stock options can be complex, in part because of the income tax consequences to the optionee following a transfer of the option.
10b5-1 plans allow insiders flexibility in structuring stock sales.
shares over a period of time, which can extend beyond the window period. As long as subsequent sales follow the terms of the plan — which prescribes the number of shares to be sold and the price — the sales meet the requirements of the securities laws. Normally the company adopts guidelines for 10b5-1 selling programs, and executives who wish to take advantage of the provision should receive the advice of counsel regarding compliance with the rule.
Tax considerations. Selling at a profit comes at a price: taxes. Although the federal capital gains rate (15 percent on most long-term gains) is currently extremely favor-able, state tax on capital gains can greatly reduce the net proceeds from sale. In higher-tax states, the sale may even contribute to or cause an AMT liability. Even under the current federal rate structure, managing the tax consequences of sale will be a crucial issue. If federal rates increase, as a change in administration or budget prospects may dictate, tax consequences will be even more important to address. Luckily, there are a few techniques which may enhance the tax treatment of a sale.
Qualified small business stock. If an executive’s equity in his business is qualified small business stock (“QSBS”), he or she will benefit from a slightly reduced capital gains tax (a benefit which will be lost if the executive is subject to the AMT). A potentially greater benefit arises from a reinvestment of the proceeds, within 60 days, in another qualifying business. To the extent that a qualifying rollover occurs, the original sale is not taxable. Eventually the gain will be taxable upon a disposition of the new property, but the ability to defer the tax may produce a significant benefit.
As with all tax considerations, investors need to consider the impact of state taxes. For purposes of California law, for example, the rollover provision applies only if the new company meets certain tests regarding its business activities within the state. Investors who assume that the tax-free rollover automatically applies for state purposes may be surprised when the California Department of Revenue presents a bill, with interest due, upon a sale and reinvestment in a nonqualifying business.
Charitable remainder trusts. Charitable remainder trusts (“CRTs”) are one of the most commonly used tax deferral techniques, particularly with investors who wish to combine charitable giving with tax-deferred diversification. A CRT pays an annual distribution to a designated beneficiary, and at the end of the trust term any assets remaining in the trust go to a named charity or to charities to be elected. The donor receives a charitable donation deduction when he or she establishes the CRT, equal to the present value of the charity’s expected remainder interest. Income earned by the CRT is untaxed until distributed to the current beneficiary. Consequently the CRT allows holders to diversify their holdings through a sale of shares by the CRT, to defer tax until receipt of payments
Managing the tax consequences of a sale is a crucial component of the IPO planning process.
by the individual beneficiary, and to compound their investment returns by investing the pretax value of the stock rather than the after-tax value.
CRTs can be flexible instruments. The donor has latitude in establishing the timing and amount of distributions, and the identity of the ultimate charitable beneficiary.
Exchange funds. An exchange fund is a partnership among a number of investors, each of whom contributes shares to the fund. Each investor then owns a piece of the entire pool of assets, rather than just his or her initial stock. The contribution to the exchange fund is not a taxable event as long as certain conditions are met. One particular requirement imposed by tax law is that a certain portion of the exchange fund’s portfolio must consist of assets other than stock, securities, or certain other categories of assets. In many cases exchange funds meet that test by holding real estate; and the economic return of the fund reflects the performance of those other assets and the cost of acquiring and holding them. The net effect of the transaction is to provide a tax-deferred diver-sification of the investor’s holdings. The investment performance of the fund depends on the various stocks contributed to the fund (as well as the real estate or other assets). The “investment management” of the fund takes the form of a decision on the part of the manager which stocks to accept, and which to exclude, from the fund.
Some holders of newly public companies may find it difficult to take advantage of the exchange fund option. The investment objective of some funds emphasizes large-capital-ization stocks, making it difficult for smaller companies to find entry into acceptable funds. Exchange funds come with a number of restrictions, many imposed by tax law. Generally investors should be prepared to maintain the exchange fund investment for a seven-year period, as distributions from the fund before then may be taxable. Generally the funds are open only to accredited investors, and exchanging stock for an interest in the exchange fund may be subject to securities law reporting requirements. In combination those factors indicate that exchange funds, if used at all, should make up a relatively small portion of the investor’s portfolio. In appropriate circumstances, however, exchange funds can be a useful tool in the overall diversification process.
MLPs: Special considerations. With the upsurge in energy prices, a number of natural resource partnerships have come to market. Although in many respects the partnerships (generally known as master limited partnerships, or “MLPs”) present the same issues as IPOs, they have some unique tax characteristics that present owners with special issues. Although MLP units trade like shares of stock, the MLP is a “partnership” for tax purposes. That produces a number of benefits to investors, including the absence of a corporate-level tax. It also means that a significant portion of distributions goes untaxed, as depreciation and depletion deductions available to the MLP reduce the taxable income from the
MLPs have unique tax characteristics that warrant special attention.
investment. (Distributions from the MLP reduce the investor’s tax basis in the entity, increasing the potential for gain recognition on an eventual disposition of the unit.) Partnership status also means, however, that income from the investment is treated as “debt-financed” if the MLP uses leverage in its capital structure, and that characteristic has several implications.
Most important, “debt-financed income” is taxable, even to exempt organizations, as unrelated business taxable income (“UBTI”). For an IRA or tax-exempt foundation, income from the investment is taxable.6It compares unfavorably, in that respect, with income from other investments which is untaxed. In the case of CRTs, however, UBTI in any amount disqualifies the trust as a CRT. Income and gains are then taxable in any year in which the CRT has UBTI. As a result, CRTs are not advisable as diversification or deferred giving vehicles for MLP owners.
More generally, the structure of a particular MLP may give rise to specific issues. Because of the advantages of MLP status to outside investors, going public as an MLP may enhance enterprise value and the proceeds available from an IPO. But if the business is housed in a corporate entity before the transaction, the owner may face some signifi-cant corporate tax exposure as he or she becomes liquid. In effect, gains from the MLP are taxed twice — once at the corporate level and again as distributions come to the owner individually. A significant part of the planning in such a case is to reduce the tax burden from the liquidity event, which may affect the overall structure of the offering.
S U M M A R Y
In many ways an IPO is the culmination of a long process of building a business, and represents a milestone achievement for the business owner and the corporate team. The effort needed to take the company public can become all-encompassing, and the pressure of events around the time of the offering can crowd out other considerations. Time constraints are among the reasons why early planning is necessary. The optimal time for wealth transfer planning is far in advance of the transaction, even as early as inception of the business for founders. But the pretransaction period may offer a number of opportunities to implement family goals, which may not be available to the same extent after the offering.
In thinking about personal goals, several factors are critical:
• Investment bankers, wealth advisors, and the owner’s tax and legal advisors should coordinate closely. Transaction details will affect in many cases the personal planning strategy; similarly, steps taken by the individual owner may need to be reflected in document disclosures or deal structure.
6 Tax arises if the UBTI exceeds $1,000 for the year.
The optimal time for wealth transfer planning is far in advance of the transaction.
• Formulating at least a general sense of long-term goals (e.g., allocating wealth between family and charitable beneficiaries) can help set an effective overall wealth transfer strategy.
• Use of trust vehicles and other techniques can be a very efficient way to implement the owner’s personal strategy.
• Each strategy involves a number of advantages and potential downsides, which owners should understand before implementing a planning technique.
IRS Circular 230 Disclosure:
Lehman Brothers Inc. does not provide tax advice. Accordingly, please be advised that any discussion of U.S. tax matters contained within this communication (including any attachments) is not intended or written to be used and cannot be used for the purpose of (i) avoiding U.S. tax related penalties or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
All information and opinions discussed herein are subject to change without notice. The foregoing list of wealth planning information does not purport to be a complete enumeration or explanation of the steps necessary to establishing a long-term wealth plan. Neither Lehman Brothers Inc. nor its employees provide tax or legal advice. Please consult with your accountant, tax advisor and/or attorney for advice concerning your particular circumstances.
Information dated as of March 2006.
G0066 03/06 ©2006 Lehman Brothers Inc. Member SIPC. All rights reserved.
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