EFTA01075845.pdf

GRAT Combined with Art Partnership Black 2006 Family Trust August 14, 2012 U.S. TRUST EFTA01075845 Disclosure Any examples presented are hypothetical and do not reflect specific strategies we may have developed for actual clients. They are for illustrative purposes only. The availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. This material is current as of the date specified and is for informational purposes only. It is not a solicitation, or an offer to buy or sell any security or investment product, nor does it consider individual investment objectives or financial situations. While the information contained herein is believed to be reliable, we cannot guarantee its accuracy or completeness. U.S. Trust, Bank of America Private Wealth Management operates through Bank of America,.. a wholly owned subsidiary of Bank of America Corporation. Information in this material is not intended to constitute legal, tax or investment advice. You should consult your legal, tax and financial advisors before making any financial decisions. If any information is deemed "written advice" within the meaning of IRS Regulations, please note the following: IRS Circular 230 Disclosure: Pursuant to IRS Regulations, neither the information, nor any advice contained in this communication (including any attachments) is intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax related penalties or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. 2 U.S. TRUST e Rank of America Private Wealth Management EFTA01075846 GRAT Combined with Art Partnership Following is our understanding of the planning techniques discussed with Leon's attorneys on August 14, 2012: Step One: Create the GRAT and 2012 Family Trust Leon would create a new family trust (the "2012 Trust") with identical dispositive provisions to the Black 2006 Family Trust (the "2006 Trust"). Thereafter, Leon would create a grantor retained annuity trust (the "GRAT"). The GRAT would be funded with a contractual right to receive all Trust Accounting Income of the 2006 Trust to which Leon is entitled under the terms of the 2006 Trust (the "Income Right"). The term of the GRAT would be 2-3 years, after which time the remainder would be distributed to the 2012 Trust. Upon receiving the Income Right, the 2012 Trust will contribute it to the an art partnership ("BFAP"), as described on the following pages. GRAT Mechanics: • Leon creates the 2012 Trust. • Leon creates the GRAT. • A valuation is obtained for the Income Right. • Leon gifts the Income Right to the GRAT. • An annuity is paid to Leon each year during the GRAT term. • At the end of the GRAT term, the Income Right and any income remaining in the GRAT, after satisfying all annuity payments to Leon, will pass to the 2012 Trust, which will assign the Income Right to BFAP . • Following the assignment of the Income Right by the 2012 Trust, Trust Accounting Income will be paid to BFAP. 3 U.S. TRUST Bank of America Private Wealth Management EFTA01075847 GRAT Mechanics Step 2 During the GRAT term GRAT receives Trust Accounting Income 2006 Trust Step 1 Step 3 Step 4 Step 6 Leon gifts Income GRAT pays Leon At end of GRAT Once the Income Right is Right to GRAT annuity during the term, remainder contributed to BFAP. it GRAT term (Income Right and receives Trust remaining Accounting Income income) pass to 2012 Trust • 2012 Trust BFAP Step 5 After the GRAT term, 2012 Trust contributes Income Right to BFAP 4 U.S. TRUST 4030' Bank of America Private Wealth Management EFTA01075848 GRAT Combined with Art Partnership Pros: • GRAT can be structured to produce a gift valued at, or close to, zero (a "zeroed-out GRAT"). • If Leon lives for three years after the gift of the Income Right, the property held in the 2006 Trust which generates the Trust Accounting Income would not be included in his estate. • If Leon survives the GRAT term, the Income Right would not be included in his estate. • A zeroed-out GRAT virtually eliminates risk of excess gift on audit—an IRS increase in value would require an increase in the annuity but almost no taxable gift would result. Cons: • GRAT is only successful if income from the Income Right exceeds the IRS discount rate (1% for August 2012). • If Leon dies during the GRAT term, the GRAT assets, including the Income Right will be taxed in his estate. • Cash flow from the Income Right may prove insufficient to pay the annuity. GRAT will have to borrow. • Risk that assets held in the 2006 Trust that generate Trust Accounting Income are included in Leon's estate if he dies within three years of GRAT funding. 5 U.S. TRUST 46," Rank of Amer*, Private Wealth Management EFTA01075849 GRAT Combined with Art Partnership Step Two: Create Art Partnership BFAP would be formed by Narrows Holdings LLC ("Narrows I") and the Black 2006 Family Trust (the "2006 Trust") as limited partners and LB 2012 Family LLC as general partner (the "GP"). The GP would be owned 50% by Narrows I and 50% by the 2006 Trust. Investment decisions for BFAP would be made by the GP's Class A Manager (Leon). Liquidation, withdrawal and distribution decisions would be made by the GP's Class B Manager (John Hannan). The 2006 Trust would contribute to BFAP its interests in LBF Holdings ("LBF") and Black Family Partners ("BFP"), valued without the Trust Accounting Income associated with such assets. Narrows I would contribute to BFAP fine art valued at roughly $1 billion. Ownership of BFAP would be pro rata based on contribution of capital. After the GRAT term ends, the 2012 Trust would contribute to BFAP the Income Right. Following such contribution, it is expected that Narrows I would be a 49.5% limited partner of BFAP and the 1997 Trust and the 2006 Trust collectively would own a 49.5% limited partner interest in BFAP. The GP would be a 1% general partner of BFAP. Over time, Narrows I could redeem its capital in the form of cash and would reduce its ownership interest in BFAP. 6 U.S. TRUST sta Bank of Amer*, Private Wealth Management EFTA01075850 Art Partnership Mechanics Preliminaries: • LBF distributes to the 2006 Trust all interests it owns other than a 70.869% interest in BFP. Creation of Art Partnership: • The 2006 Trust contributes assets to the GP (may include a portion of its 1.806% direct interest in BFP); Narrows I contributes assets to the GP with the goal of being a 50% owner of the GP. • The GP contributes its assets to BFAP in exchange for a 1% general partner interest. • The 2006 Trust contributes its interest in LBF and all of its 1.806% direct interest in BFP not contributed to the GP (valued without the Income Right) in exchange for a pro rata limited partner interest. • Narrows I contributes fine art to BFAP in exchange for a pro raw limited partner interest. • After the GRAT term ends, the 2012 Trust contributes Income Right to BFAP in exchange for a pro rata limited partner interest. Administration of Art Partnership: • BFAP makes pro-raw distributions of its income to the GP and the limited partners. • The GP makes distributions of its income to Narrows I and the 2006 Trust. • Narrows I makes distributions of its income to Leon. • BFAP may permit the 2006 Trust to use or rent art owned by BFAP. The Trustees of the 2006 Trust may permit Debra, as a beneficiary, to enjoy such art. • Over time, Narrows I could redeem its capital as cash and would reduce its ownership interest in BFAP. 7 U.S. TRUST AP' Bank of America Private Wealth Management EFTA01075851 GRAT Combined with Art Partnership Pros: • After the GRAT terminates, gives Leon access to income from a 36.3% BFP interest via distributions from Narrows I and the GP of 50% of BFAP's current income received by these entities. • After several years, Narrows I (wholly owned by Leon) could redeem capital from BFAP in the form of cash. • Debra is eligible to receive discretionary distributions from the 2006 Trust and the 2012 Trust, which may provide additional cash flow for Debra and Leon prior to any redemption of capital by Narrows I. Cons: • Prior to redemption, if 36.3% of BFP income is inadequate, Debra may have to request a discretionary distribution from the 2006 Trust or the 2012 Trust, which the Trustees could refuse. • Valuations may be required when Narrows I wishes to redeem its interests in BFAP. • There may be insufficient liquidity in BFAP for Narrows Ito redeem in the form of cash. Other Considerations: • The 2006 Trust could rent art from BFAP (and allow Debra as a trust beneficiary to use it); the rental payments to BFAP would increase Leon's liquidity. • Leon could also rent art from BFAP (in effect, making additional "tax-free" gifts to the 2006 Trust and 2012 Trust). 8 U.S. TRUST 0 Bank of A Writ, Private Wealth Management EFTA01075852 Art Partnership Mechanics Preliminaries LBF Holdings (retains 70.869% BFP) a §121LI LBF distributes all assets other than BFP to the 2006 Trust 2006 Trust (1.806% BIT owned directly) 9 U.S. TRUST e Rank of America Private Wealth Management EFTA01075853  Art Partnership Mechanics Formation of GP Step 2 50% non-managing member Narrows I and the 2006 Trust each contribute assets to Trust Contributes the GP liquid assts Leon Black .Class A Manager. BFAP GP LLC John Hannan, Class B Manger Contributes fine art Narrows I (Wholly owned by Leon) 50% non-managing member 10 U.S. TRUST 0 Bank of America Private Wealth Management EFTA01075854 Art Partnership Mechanics Formation of BFAP Step 3 The GP, the 2006 Trust and Narrows I each contribute assets BFAP GP LLC to BFAP in exchange for ownership interests Contributes 1% 1% general liquid assets and Pro rata partner fine art limited partner 006 Trust r Contributes a 72.675% BFP interest Pro rata BFAP limited partner Narrows I Contributes fine art 11 U.S. TRUST S Rank of America Private Wealth Management EFTA01075855 Art Partnership Mechanics Addition to BFAP After the GRAT Term Ends Step 4 The 2012 Trust contributes Income Contributes Right to BFAP BFAP GP LLC Income Right 2012Trust r 49.5% limited Contributes 1% partner 1% general liquid assets and (collectively) partner fine art V V Contributes a 72.675% BFP interest BFAP 49.5% limited partner Narrows I Contributes fine art 12 U.S. TRUST 4111P Hank of A MfriCa Private Wealth Management EFTA01075856 Art Partnership Mechanics Administration of BFAP After GRAT Term Ends Distributes BFAP GP LLC 2012 Trust 2006 Trust 50% GP income Distributes t Dis ributes 49.5% A • 50% GP income BFAP income Distributes 1 (35.974% BFP 1% BFAP Distributes income) pro rata income 100% Narrows to each trust (.727% BFP income income) Distributes 49.5% BFAP BFAP income (Receives income from (35.974% BFP 72.675% BFP interest) income) 13 U.S. TRUST S Rank of America Private Wealth Management EFTA01075857 Art Partnership Mechanics Discretionary Authority Trust may permit Debra as a trust beneficiary to use BFAP art 2006 Trust or 2012 Trust Possible discretionary distributions to Debra as a trust beneficiary BFAP may permit the 2006 Trust to Can be used to use or rent art pay taxes • owned by BFAP BFAP (Owns fine art and 72.675% BFP) 14 U.S. TRUST Rank of America Private Wealth Management EFTA01075858