investment structures

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To listen to today’s program, please call 512-597-6028Please enter Access Code 841058#

Corporations and Trust Companies

and Partnerships - Oh, My:A Review of Family Wealth Management Structures,Part II

Corporations and Trust CompaniesCorporations and Trust Companies

and Partnershipsand Partnerships -- Oh, My:Oh, My:A Review of Family Wealth Management Structures,A Review of Family Wealth Management Structures,

Part IIPart II

We’ll start the program

at 11 AM ET (US).This live program iseligible for one hourof CPE credit. Detailsat the end of the program.

Webinar ©2009 Family Office Exchange



Corporations and Trust Companies

and Partnerships - Oh, My:A Review of Family Wealth ManagementStructures, Part II

Corporations and Trust CompaniesCorporations and Trust Companies

and Partnershipsand Partnerships -- Oh, My:Oh, My:A Review of Family Wealth ManagementA Review of Family Wealth Management

Structures, Part IIStructures, Part II

A Family Office Exchange

Family Office Management and Technology Critical Issue Webinar

March 11, 2009

Christopher UzpenWithers Bergman LLP

James KaneHUB International Personal Insurance

Robert CourtemancheACE Private Risk Services




Christopher Uzpen Partner, Withers Bergman

Christopher provides tax and estate planning advice for U.S. and non-U.S.families, their family offices and businesses, as well as US pre-immigrationand expatriation planning. He also provides tax planning on corporate,

partnership and international inbound and outbound issues for a wide-rangeof businesses including publicly traded businesses, closely-held businesses,investment entities and real estate ventures.

Christopher advises fiduciaries on the tax consequences of trust investments

and on issues arising during trust administration as well as on the use offinancial products. He represents taxpayers in all matters before the InternalRevenue Service and state tax departments.

He has also been an adjunct professor teaching classes in federal taxation

including international tax and business tax. He is admitted to practice in theUnited States Tax Court.

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President, HUB International

James P. Kane, CIC Personal Insurance

With more than two decades of personal insurance experience, Jim Kane joinedHUB International in October 2005 following the acquisition of Personal LinesInsurance Brokerage, Inc. (PLI). He was named President of HUB InternationalPersonal Insurance Ltd., the personal insurance division of HUB International,

one of the largest providers of personal insurance in the United States andCanada.

Throughout his career, Jim has held several positions with local and regionalinsurance agencies. In addition, he served for 10 years as a faculty member of

the Insurance Society of Philadelphia, a nonprofit organization that offerseducational courses and workshops to the insurance, legal and financial servicesindustries.

Jim is a frequent author, speaker, and media resource on insurance issues

nationwide, especially in the area of insuring high net worth clients.

Jim is a past president of Notre Dame University’s Alumni Association ofPhiladelphia, and also serves on the board of Philadelphia World Affairs Counciland the Association for Developmental Disabilities.

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Chief Executive Officer

Robert Courtemanche ACE Private Risk Services

Bob Courtemanche joined ACE Private Risk Services in April, 2008, asChief Executive Officer. Bob has more than 25 years of experience in HighNet Worth Personal Insurance, most recently as the President of Fireman’sFund Personal Insurance business. He also worked in the AIG PrivateClient business and held key management positions with Chubb.

He is a graduate of Hobart and William Smith Colleges in upstate New Yorkwhere he received a Bachelor of Arts degree. In addition, he attended theExecutive Education program at The Wharton School of the University ofPennsylvania.

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6Webinar ©2009 Family Office Exchange

Now we are really having some fun

• Recap of Session One

– Basics use of entities

– Collaboration and coordination are critical

• Use of Partnerships

– Freeze partnerships

– Tracking partnerships

– Series partnership

• Tax Wrappers

• Private Trust Companies




Fact Pattern

• Chris and Jim (brothers) own 100% of the stock in JC corporation, asuccessful manufacturing business.

• Pre-recession value = $50MM

• Current value = $30MM

• Strong long-term prospects

• Want to incentive management with equity




Issues with current structure

• Operating Income – double tax

• Liquidity event – possible double tax

• Equity compensation (actual or phantom) – ordinary income




Do Nothing - Example

• JC sells assets in 10 year for $80MM

Sale price/gain $ 80,000,000

Corporate tax $ 32,000,000 (40%)

Tax on liquidation $ 9,600,000 (20%)

Net Proceeds $ 38,400,000

Effective tax rate 52%




Partnership Freeze

• Limit the value in C corporation

• Shift future appreciation for income tax purposes

• Ability to incentive management.

• Transfer tax planning




Freeze Partnership

JC Corp

Cont r ibu teassets$ 3 0 MM $ $

9 9 % Co m m o n

I n t e r est ( w i t h al lg r o w t h )

1 0 0 % Pr e f er r e d7 % Co u p on

1 % Co m m o n

Chris, Jim

Management team

JC LLC




Freeze Example

JC LLC sells assets in 10 year for $80MM

• JC Corp share = (assumed preferred return paid out of operating cash)

– Original Contribution $30,000,000

– 1% of growth over $30MM $500,000

– Total $30,500,000

• Chris, Jim and Management =

– Original Contribution $1,000,000

– 99% of growth over $30MM $49,500,000

– Total $50,500,000




Computation of Tax

• Sales price $80,000,000

• Income tax

– Corporate tax ($30.5 MM) $12,200,000 (40%)

– Gain on liquidation ($18.3MM) $3,660,000 (20%)

– Partnership growth ($50.5MM) $10,100,000 (20%)

– Net Proceeds $54,040,000

– Effective tax rate 32.45%

– Savings $15,640,000




Other Uses

• Real estate in corporations

• Investments trapped in corporation

• Consider for IPO structure

• Use of generation skipping trusts




Family Office Operation

• Family Office – No clear definition

– Concierge services vs. fully operational staff

– Control vs. outsourcing

• Fully staff office – assuming the risk

– Business insurance vs. Personal Insurance Leveraging the exposures

Leveraging the investment

– Property

Real

Personal

– Liability

General

Professional

– Employee liability

Health and life

Workers Compensation

Retirement planning

Retention and training




Knight Problems

• Deduction for expenses

• Expenses that are limited

– Commonly or customarily incurred

Investment advisory

Family office

Legal/accounting (?)

Insurance

– Unique expenses fully deductible




Tax Stakes

• 2% floor

• Non-deductible for AMT purposes

• Can solution be found in partnerships?




Case Study

• Family has three multi-generational trusts with $500MM of investment

assets for benefit of Mom, Dad, children and grandchildren. Family office

(structured as a corp.) provides investment, accounting, tax and other

services to family and trusts.

• Family office receives $5 million in fees per year - $1.5MM deductible

without reference to 2% floor and $3.5MM subject to floor.

• All trusts in AMT so $3.5MM completely non-deductible ($1MM tax cost

per year)




Structure

Trust Trust Trust

Family Office

Corp

Inv. Pshp#1

Inv. Pshp#2

Inv. Pshp#3

$500 MM




Restructure

Trust Trust Trust

Family Office

Corp

Inv. Pshp#1 Inv. Pshp#2 Inv. Pshp#3




Restructure

• Family office

– General partner

– Entitled to share of profits

– 2% floor (?)

– Character of income




Combining with Knight Structure

LLC

LLCProperty #1

LLCProperty #2

LLCProperty #3

Family OfficeTrustTrustTrust




Private Placement Life Insurance

Tax Wrapper




PPLI – Structure

HNW/Trust Insurance

Company

SegregatedAccount

CustomizedInvestment

Program

Insurancecosts




PPLI - Benefits

• Tax deferred build up within policy

• Income tax free if held to death

• Tax-free loans (w/ proper structuring)

• Access to hedge funds

• Customized investment program

• Cost: 50-90 basis points v deferral/elimination of income taxes




Eligible Investments

• Diversified

• Insurance dedicated products v publicly available

• IDFs




Tracking Partnerships




What is a tracking partnership?

• Single LLC

• Performance tied to specific investment

• Address varying investment objective




Tracking Structure

LLC

Fixed Income

Growth Assets

Parent’sTrust

Children’sTrust

80% -growth

20% - fixed income 20% -growth80% - fixed income




Tracking Structure

LLC

PPLI

Parent’sTrust

Children’sTrust

80% - alternative20% - fixed income 20% - alternative

80% - fixed income

Hedge Funds Fixed Income




Series LLC

• Single entity

• Separate business/investment objectives

• Separate ownership

• Segregation of liability

• Benefits

• Tax issues




Series LLC Structure

Series LLC

Series AProperty #1

Series BProperty #2

Series C

Property #3




Series LLC Structure

Series LLC

Series A

Property #1

Series BProperty #2

Series CProperty #3

Manager Investor#1

Investor#2




Private Trust Company (PTC) – What is it?

• Entity (typically corp or LLC)

• Limited to specific group of clients

• Does not offer services to public




Why use PTC?

• Issues

– Corporate trustee

– Individual trustee




Benefits of PTC

• Directors control

• Flexibility

• Family members may be directors (limits)

• Less pressure to diversify holdings

• More willing to manage business

• Great liability protection

• Cost savings - maybe




Issues with PTC

• Cost

• Regulatory supervision and reporting

• Lack of deep pockets

• Family conflict

• Tax considerations




Typical Structure

Purpose Trust

Distribution

Committee

Private Trust Company

AdministrationAgt

ABC Trust Companyor

Family Office

Board of Directors

Family, Advisors

Investment

Committee

Other

Committee




Q&A / DiscussionQ&A / Discussion



Thank you for joining us today Thank you for joining us today


Christopher UzpenWithers Bergman LLP

[email protected]

203.302.4076

James KaneHUB International Personal

[email protected]

312.279.4856

Robert CourtemancheACE Private Risk Services

[email protected]

973 408-6000



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About Withers Bergman

Withers Bergman LLP is an international law firm dedicated to the business, personal and philanthropic interests ofhigh net worth individuals, their families and advisors. For over one hundred years, our firm has providedsophisticated legal advice to successful individuals, from British aristocracy to Wall Street entrepreneurs and seniorexecutives, from privately-held business owners to celebrities, artists and other international figures who achievesubstantial earnings.

Our work includes:

estate planning and lifetime giving strategies

tax planning and analysis

estate and trust design, implementation, and administration

insurance analysis

asset-protection planningtrust litigation

tax-efficient investment strategies

Families are the core of our practice. Historically, we have represented the landed gentry and their estate offices inthe United Kingdom from the time of our inception. Today, we represent family offices with interests in over 80countries.

Attorneys at the firm have an extensive understanding of the interrelated nature of income tax, business, estate andcross-border planning. We have 150 tax attorneys across seven offices worldwide who are supported by otherpractice areas such as business transactions, employment, real estate and litigation.



IRS Circular 230 Disclosure:

Any discussion of U.S. tax matters contained herein (including any attachments)

is not intended or written to be used, and cannot be used, for the purpose of avoiding

penalties that may be imposed by the Internal Revenue Service.

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