Before You Go Public, Sell Your Business, or Form a Private Equity or Hedge Fund

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March 21, 2014

Whether you’re a business owner considering going public or selling your business, or the sponsor of a private equity or hedge fund, issues like hiring the right investment banker and finding the right buyer or investors might be top of mind. But before you proceed, consider one or more wealth transfer strategies.


By engaging in certain wealth transfer strategies,you may be able to transfer your business in a moretax-efficient way and achieve your unique succession planning goals,” says Joel Yudenfreund, Wealth Management Strategist for The Private Client Reserve. Coordinate with your financial team and your tax and legal advisors as far as possible inadvance of a sale, as some of the more advanced

strategies have a higher chance of success if you implement them well before the liquidity event.


For example:


  • By transferring part or all of your business to your beneficiaries or to trusts for their benefit before the IPO/sale, the transfer will be calculated at the pre-IPO/pre-sale value. Any post-IPO/post-sale increase in value will be out of your taxable estate.
  • Founders of a hedge fund or private equity fund often receive carried interests upon creation of the fund. “Carried interests are generally where hedge fund and private equity fund founders make most of their money. Carried interests have received a lot of press because of their preferential tax treatment,” says Yudenfreund. For carried interests transferred at inception, the transfer will be calculated at the inception value and any increase in value will be out of the taxable estate.
  • If the interests you transfer represent a minority interest or are not marketable, you may be able to obtain minority and lack of marketability discounts, which might lower the value of the interests for transfer tax purposes.

Here are three wealth transfer strategies you might consider.

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March 21, 2014

1. Gifting

The unified estate and gift tax exclusion allows you to give away $5.34 million ($10.68 million collectively for spouses) tax-free in 2014. In addition, you can give the current $14,000 ($28,000 collectively for spouses) annual exclusion to as many people as you desire tax-free.


“Gifted assets — and all appreciation in value of and income earned on the gifted assets — will be out of your estate. Additionally, if the value of the gifted interests can be discounted, more interests in your business or fund can be transferred tax-free,” Yudenfreund says.


2. Selling

business or fund to your beneficiaries or to trusts for their benefit.


You can receive cash or a note for the purchase price. While a sale will not get the current value of the interests out of your taxable estate, appreciation in the value of the interests and income (less the interest due on a note) earned on the interests will be out of your estate.


In addition, if you are able to discount the interests, the purchase price will be at the discounted value, and the difference between the undiscounted value and discounted value will be removed from your estate, tax-free.


If you receive a note, you can freeze a portion of your taxable estate at the face amount of the note. When assets are sold in this fashion, the face amount of the note is often maximized.

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March 21, 2014

3. Leveraging GRATs

With a grantor retained annuity trust (GRAT), you contribute assets and, in return, the GRAT pays you a fixed amount each year for a set number of years. If you’re living at the end of the set number of years, assets remaining in the GRAT pass to your beneficiaries with no estate or gift tax consequences.


A taxable gift may be triggered on creation of a GRAT because your beneficiaries will receive any assets remaining in the GRAT at the end of the setnumber of years. A GRAT may be beneficial because the amount of the gift you make may be minimized, possibly even to zero. The value of the gift to the GRAT is the difference between the value of the contributed assets and the value of your retained right (the present value of the payments you will receive over the set number of years). The longer the time period of your retained right and the

higher the amount paid to you, the larger the value of your retained right and the smaller the gift.


Discounting can also result in additional benefits when using a GRAT.


“Every business owner’s goals and situation are unique. But by researching and understanding wealth transfer strategies, owners can potentially make the process of selling their business or taking it public even more seamless and help support the best outcome,” Yudenfreund says. “While U.S. Bank and its representatives do not provide tax or legal advice, we can work with your tax and legal advisors to help create an outcome that is suitable for your unique objectives.”


This article was adapted from The Private Client Reserve whitepaper, “Pre-IPO, Pre-Sale and Carried Interest Planning.”


Please see important information below.

Wealth Transfer