continum consulting - flp-esop arrangement

8/8/2019 Continum Consulting - FLP-ESOP Arrangement

1/26

.

Dear

We are pleased to have had the opportunity to provide a feasibility

assessment of your familys preparation for coordinating the

practices and operational process for the asset, entities and people

who will be involved in working with you to manage the

diversification of your closely held company stock.

This will begin with introducing you to the strategy, and the

business elements to support it. Then we will perform a discovery

of your current landscape of structures and people, time frame for

getting started, your budget for consulting work. This will befollowed by an onsite visit to discuss with employees and

executives the practices set up and operational processes plus

current systems and technology in use. The on site visit helps us to

understand any gaps, problems and challenges, prioritize solving

them and as well as identify the projects, priorities, budget to build

prior to strategy implementation .

Robin Coady Smith | 302.235.0234Managing Partner

PRESERVATION OF WEALTHCONCENTRATED IN CLOSELY HELD C CORPUSING A FAMILY LIMITED PARTNERSHIP (FLP) &AN EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)


2/26

.

STRATEGIC COORDINATION OFA FAMILY LIMITED PARTNERSHIP (FLP)AND AN EMPLOYEE STOCK OWNERSHIP

PROGRAM (ESOP)

FLPSOP

1990-2004 ESOT Resources, Inc. All rights reserved. FLPSOP is a registered trademark ofESOT Resources, Inc.


3/26

. 3

A TAX-ADVANTAGED STRATEGY AND

PLANNING TOOL FOR BUSINESS OWNERS

YOUR CHALLENGES

Is 90% or more of your personal net worth is invested in thehighly appreciated stock of your closely held business?

Do You understand the importance of diversifying some of

your stock? Do you know your choices?

Is your basis in your stock mostly capital gains? How much?

Are you willing to pay capital gains taxes to free up of share-

holder liquidity?

Do you or would your family want to maintain voting and

operational control of your company? If it could be

possible to achieve diversification of your stock while keeping

control, would you?

Do you risk liability exposure? How are you protecting

your hard earned equity value?

Would you know how to compress the value of your assets by

30%, 40% or even 50% to reduce estate taxes?

An ideal tool, the FLPSOP solves these challenges by

creating a tax advantaged, controlled market for closely held

stock. The FLPSOP allows you to remain in full control of

your company. 100% of all costs for shareholder liquidity are

tax deductible corporate expenses and 100% of the stock sale

proceeds can be tax deferred during your lifetime and

eventually eliminated.

FLPSOP


4/26

. 4

Family Capital Management Co.

C Corpclosely held

operating company

A BUSINESS PURPOSE

CLIENT RETAINS OPERATIONAL CONTROLOF FLP AS MANAGING DIRECTOR OF FCM.

CLIENT IS MAJORITY SHAREHOLDER OF FCM.

ADULT CHILDREN ARE DIRECTOR/EMPLOYEEAND RECEIVED SALARIES/BENEFITS.

AN OPERATING COMPANY WITH A BUSINESS PURPOSE

NON-FAMILY ARE EITHER SALARIEDSTAFF ONLY OR OFFICER/DIRECTORS.

FAMILY AND SELECT STAFF MAYBE SHAREHOLDERS.

Manages the family interest in C Corp stock, other assets/entities,directs business affairs of the FLP

FLP


5/26

.

FLPS AND LLCSADD THE OPPORTUNITY FOR

POTENTIAL VALUATION DISCOUNTS


6/26

. 6

CAPITALIZING

THE FAMILY LIMITED PARTNERSHIP (FLP)

FLPPARTNERSHIP INTERESTS

ClientcreatestheFLP,appointinganewlyformedCapitalManagement

CoastheGeneralPartneroftheFLP.TheGPretainsthecontrolinterest.

intheFLP.

TheClienttransfersexistingassets,includingtheircloselyheldstocktothe

FLPinexchangetakingbacktheminorityinterest discountedFLPUnits

General Partner manages

CONTROL INTEREST

MINORITY INTERESTSMinority interests may be eligible

for valuation discounts of 30%, 40%or even 50% by a qualified

appraiser.Discounts are for lack ofcontrol and lack of marketability.Valuation discounts increase tax-free gifting and may decreaseestate and gift tax liabilities.

Marketable Securities

Real Estate

C Corporation stock

Oil & Gas Interests

Collectibles & Antiques

WEALTH PRESERVATION


7/26

. 7

THE FAMILY LIMITED PARTNERSHIP (FLP)

ASSET PROTECTIONAn FLP is very effective in preventing seizure of assets by futurecreditors. A creditor can not force liquidation of a partnership as ameans to collect on a judgment against a limited partner.

VALUATION DISCOUNTSThe FLP enables valuation discounts of 30 to 50% for lack ofmarketability and lack of control on the part of minority partners.

These valuation discounts can create potentially significant gift taxand estate tax leverage.

RETAINED CONTROLThe business owner retains operational control over the FLP via hisappointment as life time Managing Director of his FCM company.This management company, in turn, serves as General Partner ofthe FLP.

INCOME SHIFTINGBy gifting shares of FCM company to family members and ifif the management company is structured as an S Corp or LLC,the business owner can shift FLP income to family members.

AS A BUSINESS ENTITY, A VALID BUSINESS PURPOSEIS REQUIRED FOR THE FLP. IT MAY NOT BE CREATEDAND RECEIVE VALUATION DISCOUNTS IF IT EXISTS TORECEIVE DISCOUNTS ONLY.

FEATURES/BENEFITS:


8/26


9/26

.

ESOPEMPLOYEE STOCK OWNERSHIP PROGRAM

-Shareholder Liquidity; Tax-deductible funding for- Business Succession; Provides owner with

continuing management control

- Capital Investments; Finance capital in a manner bothdeductible and depreciable

- Wealth Preservation; May reduce owners estate taxby 40 to 50 percent; may reduce owners risk of lossby offering tax-deferred diversification of closely-held stock into a replacement portfolio of stocksand bonds; may eliminate capital gains taxes on highly

appreciated, closely held stock.


10/26

. 10

An ESOP is a tax qualified defined contribution retirement plan.It is designed to invest primarily in the common stock ofsponsoring companies and corporations. It is financed with taxdeductible principal payments or a combination of 1) cash 2)seller notes and 3) third party loans. It is also a tool ofcorporate finance for sponsoring companies.

TAX ADVANTAGES OF ESOPS

FOR SPONSORING COMPANIES: 100% of all ESOP costs aretax deductible business expenses. This includes principalpayments on credit facilities used to finance the ESOP stock

purchase and dividends on ESOP shares.

FOR SELLING SHAREHOLDERS: Eligible shareholders canelect to defer capital gains taxes on the sale of closely held CCorp stock to an ESOP. For business owners who have built upsignificant equity values in their company, this provides the witha way to cash out without having to pay capital gains taxes.

FOR EMPLOYEES: An ESOP gives employees the opportunityto receive an employer-paid equity position in the company.That equity value grows in a tax exempt environment.

THE ESOP ELEMENTS OF AN FLPSOP


11/26

. 11

Family Capital Management Co.manages the family interest in C Corp, Stock, other assets/entities,

directs business affairs of the FLP

C Corpclosely held

operating company

ESTABLISHING THE ESOP

C Corp creates theESOP and makesdeductible deposits

ESOP

A tax qualified, deferred

contribution retirement plan,providing retirement benefits

and

A control led, tax advantaged

market for c losely held stock.

ESOP sharesto participants


12/26

. 12


FLP ESOP

SHAREHOLDER EQUITY

FLP SELLS

C CORP

STOCK TO

THE ESOPBASED ON

BUY/SELLA

GREEMENT

TERMS

C Corpclosely held

operating company

FORMALIZES BUY/SELL

ISSUES

PUT OPTIONS

TO ESOP SHARE-

HOLDERS

Marketable SecuritiesReal Estate

C Corporation stock

control interest shares

Oil & Gas Interests


Put options enableshareholders the right todemand liquidity for their

ESOP shares atRetirement, Disability,Death or Termination.

At least 30%of equity valuemust be owned by ESOP

before Section 1042 rolloverbecomes available. Rollover

securities purchased here

1

2

3

ESOP STOCK PURCHASE

FLP IS SELLING SHAREHOLDER TO ESOP


13/26

. 13

EMPLOYEE STOCK OWNERSHIP PROGRAM(ESOP)

BUSINESS SUCCESSION ADVANTAGESCreate economic leverage by loaning tax free death benefits tothe ESOP. The ESOP acquires shares of company stock.Eliminates concessions normally required in third party sales.Eliminates capital gains taxes on the sale of highly appreciated,

closely held company stock.

SHAREHOLDER LIQUIDITY & DIVERSIFICATIONThe sponsoring company, in creating the ESOP incurs an obligationto eventually repurchase ESOP shares when it comes time to paybenefits to participants and beneficiaries.In privately held companies, the IRS rules require the ESOP to provideparticipants and beneficiaries with a series of put option

opportunities to convert their ESOP stock accounts into cash.The strength of the sponsoring companys ability to honor put optionsin a timely manner is a critical cornerstone of ESOP share values.For example, the stronger the ability to meet benefit payments,the lower the valuation discount for lack of marketability and thehigher the potential sale price for the business owner.

TAX ADVANTAGED INVESTMENTSAn indexed universal life policy is ideal for establishing a taxadvantaged, dedicated reserve fund to accumulatecash for future ESOP benefit payments. In general, most companiesthat sponsor an ESOP should deposit $50,000 to $60,000 per yearfor every $1 million of stock owned by the ESOP. This is to createthe solid foundation for payment of ESOP benefits.


14/26

. 14

IRC Section 1042 TAX DEFERRED ROLLOVER

A 1042 rollover is similar to 1035 exchange of like property.

In a 1042 rollover, the selling shareholder* is completing atax deferred exchange of 100% of the fair market value oftheir closely held company stock for a diversified portfolio ofpublicly traded securities.

*Selling shareholder must be an individual, trust, estate or partnership. Theselling shareholder must have owned the shares that are sold to the ESOP for atleast 3 years prior to date of sale. It may be possible that the clients own holdingperiod for the closely held stock can be carried over the FLP and tacked on theselling shareholders holding period.

PERMISSIBLE 1042 ROLLOVER INVESTMENTS qualified replacement property: equity or debt securities of US domiciled operating corporations, either publiclytraded or privately held.

Investments NOT Qualified as Replacement Property: mutual funds real estate US Government securities Municipal bonds & annuities

Life Insurance Promissory Notes Certificates of Deposit Savings Accounts Collectibles


15/26

. 15

1042 ROLLOVER

Rollover is a deferral of capital gains tax. However, carefulplanning is required to maintain the deferral and theachieve the eventual elimination of capital gains tax.

Certain events can result, accidentally, or intentionally,

in a disposition which means a taxable event happensthat triggers payment of the deferred capital gains tax.

THE 4 MAIN TRIGGER EVENTS include: Sales Maturity Calls by the issuer

Seizure of rollover investments by a judgment creditor


16/26

. 16


BUY SELL AGREEMENT FUNDING

C Corpclosely held

operating company

C CORP TAKES COLLATERAL ASSIGNMENTIN CASH VALUES & DEATH BENEFITS

IRREVOCABLE INSURANCETRUST

CASH

SHAREHOLDERS

STOCK

LOAN TAX FREE$ TO ESOP TO

PURCHASEREMAINING STOCK

ESOP

Marketable Securities

Section 1042 Securi ties

Real EstateControl in terest shares

of C Corp Stock

Oil & Gas Interests


FLP

BUSINESS SUCCESSION


17/26

.

Partnership EntityAdministration


18/26

. 18

Partnership StructureExample

Client

Spouse

Child

Child

Family CapitalManagement Co.

Limited PartnershipAccount 1

Operating CashAccount

Vehicles

Limited PartnershipAccount 2Real Estate

Limited Partnership

Account 3Majority Interest FCM


1042 Rollover Securities


Investment Portfolio

Taxable

$ Contributions

Initial & future

PartnershipDistributions

Tax Liability

Valuationof

Partnership

Units (NAV)

Current/FutureMinority Partners

Majority Partner


19/26

. 19

Inside the Partnership

Example

CASHFORFUNDING

ACCOUNT2

ACCOUNT4

CUSTODY

EQUITYSTYLES- %ofportfolio

OPERATINGACCOUNT

ACCOUNT5

ALLCONTRIBUTIONS,

WITHDRAWAL,EXEPNSESCOMEFROMHERE

INCOME & OVERDRAFTSIncomestaysinaccountwhereearneduntilmovedtotheOperatingAccount.

Overdraftsarenotcuredbymovingcashfromcashforfundingoroperatingaccount

Amortization/AccretionsonbondportfoliosadjustPtoIorItoPofthe

Bondportfoliosubaccount

EXPENSESCustody,advisoryorinvestmentmanagementfeescomesfromrespective

managersubaccount.

Miscellaneousexpensesareallocatedpro-rataacrossaccounts.

Sample

Sub accounts

Of Master

Custody


20/26

. 20

FLP FCG ENTITIES

INSIDE

BASIS

OUTSIDE

BASIS

UNITS OF

PARTNERSHIP

VALUE OF UNITS

IS BASED ON NAV

OF

SECURITIES HELD

INSIDE THE FLP

REAL ESTATE BUSINESS

INTEREST

MARKETABLESECURITIES

VALUATION OF

PARTNERSHIP IS

MARKET VALUE OR

APPRAISED VALUES

OST BASIS

F ASSETS

EMAINS

HE

CTUAL

ASIS

COST BASISOF FLP UNITS

IS THE

STARTING

NAV EITHER

$1 OR $10

ARE COMMO

CHOICES

Partnership Basis Tracking(inside vs. outside basis)


21/26

.

Necessary

Supporting Services


22/26

. 22

Accounting Hub

The diversity of investments and non financial assets as well asentities involved in todays wealth transfer or wealth managementstrategies requires an integrated hub of accounting software in order to

accurately account and report, as well as to provide accuratestatements to shareholders and stakeholders.

Accounting systems may include any one or more of;

General Ledger Partnership Accounting Financial Accounting

Investment Accounting Trust Accounting

As well, systems also include integration of systems and spreadsheetsthat ordinary would not see each other or share information or datawith an interface.


23/26

. 23

General Ledger

A general ledger is highly necessary to track the many items of dataand transactions related to non publicly traded assets as well as debitsand credits to and from general ledger categories of the business.

A general ledger is the cornerstone of accuracy of an accounting hub inboth operating businesses, as well as the business of family wealthmanagement in either a family office, a capital management firm or aprivate family trust company, as best fits each case.

A general ledger must often integrate with other accounting systemssuch as partnership accounting, investment accounting or trustaccounting


24/26

. 24

Partnership Accounting

Reporting Needs of the Partnerships

Monthly liquidity Monthly valuation of NAV Monthly valuation of Partners Capital Account

Due to the complexity of many partnerships, partnership accounting ishighly necessary to track the many data points which may come froma general ledger or either manual or aggregation of data from manydifferent sources.

The appropriate data should automatically load into the partnershipaccounting software. Partnership accounting will maintain thepercentage of each partnership owned by each other partnership entity,individual or trust. The frequency of updates will be based on thenature of the non-publicly traded assets held in one or morepartnerships. It is not uncommon for non-publicly traded assets to bepriced annually.

The partnership accounting will facilitate preparation of K-1s for eachpartnership.


25/26

. 25

Master or Unitized

Custody Services

Operational and Administrative Services

Custodians take on many different forms and provide different levels ofservice. Some firms provide custody at seemingly no cost. This does notmean one custody service is the right fit in all arrangements.

Custody performs the following services:

Safe keep securities Process security purchases, sales, and deliveries

Collect and post interest, dividends, and other payments Maintain detailed records of transactions and portfolio holdings Deliver comprehensive account reports, on line access, on line statements Automatically sweep cash balances into desired short-term investment

vehicles Monitor and collect both ordinary and extraordinary trustee fees and

investment manager fees Provide tax information to the client and investment manager on a periodic

basis, including 1099s at year-end


26/26

Income

Tax Returns

Personal tax return preparation and filing will be prepared by yourtax preparer. A detailed K-1 from the partnership will be provided

to the beneficiaries by at the beginning of each new year.

Partnership accounting and tax reporting should be the responsibility ofof an experienced accounting firm with demonstrated experience inhandling accounting and tax preparation around partnerships.

continum consulting - flp-esop arrangement

Documents