Philanthropic

Partial

Stock Redemption

Vincent J. Gallo & Associates, Inc.

1400 Old Mill Circle

Winston-Salem, NC 27103

336-765-0122 336765-0223 Fax

www.vincegallo.com

Vincent J Gallo &

Associates,Inc.

Disclaimer

The following presentation is for

information purposes only. Any and all

tax and legal issues should be

thoroughly reviewed by competent

legal and tax counsel.

Any information contained in this

presentation should not be considered

the providing of legal or tax advice.

Vincent J Gallo &

Associates,Inc.

Objectives

• Structure a Partially

Deductible Stock redemption

Plan

• Reduce Estate Tax Exposure

Provide Discretionary Income

for Retirement

Vincent J Gallo &

Associates,Inc.

Assumptions &

Conditions

• Example, Inc. is other than an S Corporation

• Valuation of The ABC Co., Inc. is by outside appraisal firm

• AFR rate for CRT will vary at time of donation

• Insurance issued on standard non-smoker basis

• Legal counsel consulted before any decisions are finalized.

• All financial assumptions are hypothetical and are neither guarantees nor warrantees of actual performance

• Appropriate legal and accounting requirements will be completed by competent parties chosen by Shareholder

Vincent J Gallo &

Associates,Inc.

Objectives

• Establish a selective retirement program

• Develop business ownership succession model

• Solution to provide for successor generations beyond current lives in being

• Optimize transfer taxes in a changing tax environment

• Obtain reasonable income tax relief

• Develop a solution that optimizes cash flows

Vincent J Gallo &

Associates,Inc.

Assumptions

• C Corporation

• Owner Age 61 – 95+% Owner

• Others - < 5.0%

• Valuation - $ 5 M

• No Buy –Sell

• 401(k)

• Approx 100 Employees

• No Plans in Place for Exit or

Succession Planning

Vincent J Gallo &

Associates,Inc.

Assumptions (cont’d)

• Objectives

• Succession Plan

• Income for Owner

• Optimize Cash Flow

• Enhance Estate Plan

– Reduce Transfer Costs

Vincent J Gallo &

Associates,Inc.

The ABC

Company, Inc.Owner

Charitable

Remainder

Trust

Owner Donates $ 2

Million of The ABC

Co., Inc. Stock to a

Charitable

Remainder Trust

Vincent J Gallo &

Associates,Inc.

Stock to CRT

Stock transferred to CRT subject to IRC Sec.

664; part gift part retained income interest.

Tax deduction based upon:

• Age & Number of Income

Beneficiaries

• Term of Trust

•Payout Rate (subject to 10%

remainder test)

•AFR Rate at date of Gift

Stock value need be based upon objective

valuation by independent party.

After transfer, Father, Son/Dau and CRT are

the three Shareholders representing 100% of

outstanding stock of Example, Inc. Trustee of

CRT has full rights to stock held by trust.

Vincent J Gallo &

Associates,Inc.

Results..So Far

• Income Tax Deduction

• Joint Life Calculation

• AFR 5.20%

• $366,1400 subject to 30% AGI Limitation

• Creation of a CRT

• FLIP CRT

• 7.00% % Payout

• Charitable Remainderman

• Reduction of Estate Tax Liability Basis

• $2 Million – Out of Estate

• Owner holds $3.0 M Stock -Control

Vincent J Gallo &

Associates,Inc.

The ABC

Company, Inc.

Owner

$3.0 M

Others

$0.25MC R T

$2.0 M

The Trustee(s) of the CRT sell the stock it holds to

a Qualified Support Organization( Q S O) for a

demand note

Vincent J Gallo &

Associates,Inc.

What is a Q S O ?

• Meets Requirements of IRC Sec 509(a)(3)

• Operate Exclusively for the Benefit of One or More Public Charities

• Operated, Controlled or Supervised by One or more Public Charities

•NOT Controlled by a Disqualified

Person

• Tax Treatment

• Public Charity

• Not a Private Foundation –NOT Subject to IRC Sec 4940 -4948

Vincent J Gallo &

Associates,Inc.

Why a Q S O ?

• CRT cannot redeem non-public stock with a Debt Instrument

• Public Charity can redeem non-public stock with a Debt Instrument

• Q S O is considered a Public Charity by IRS

• Q S O can redeem non-public stock with a Debt Instrument

• Optimized Cash Flow for The ABC Co., Inc.

Vincent J Gallo &

Associates,Inc.

Caution – Potential

Abuses

February 3, 2005

The Honorable John Snow

Secretary

U.S.Department of the Treasury

1500 Pennsylvania Avenue, NW

Washington,D.C.20220

Charles E. Grassley Max Baucus

Chairman Ranking Member

Concerns

• Non-Existent Distributions

• Offshore Investment - $$ back to

donor

• Loans back to Donor

Vincent J Gallo &

Associates,Inc.

C R T7.5%

Demand

Note

QSO Issues Demand Note

for Stock Redeemed

Trustees of QSO

Vincent J Gallo &

Associates,Inc.

Stock Sale

CRT accepts the offer by the trustees of the

QSO to redeem all stock held by the CRT.

QSO offers a Demand Note of 8.0%* for the

$2,000,000 of The ABC Co., Inc. stock held by

the CRT.

The Trustees of the CRT accept the Demand

Note as full consideration for the stock.

QSO is Exempt – No Tax on Sale

* The interest rate may reflect a risk premium

Vincent J Gallo &

Associates,Inc.

Demand NoteA demand note for $2 million will be issued by

QSO. with an interest rate of 7%. This note will be

exchanged for the Example, Inc. stock held by

CRT.

Interest payments will be due and payable by

QSO to the CRT at least annually. Interest

Payments can be made to the QSO by The ABC

Co., Inc. The interest should be deductible as a

charitable contribution, subject to the 10% of profit

limitation on deductibility. The principal amount of

the note , $ 2 million, shall be due and payable

upon demand by the trustees of the CRT. It is not

anticipated that the trustees of the CRT will call

the principal of the note in the near term.

A survivorship insurance policy, in the amount of

$2 million, insuring M/M Owner shall be issued

with Son/Dau as owner and beneficiary. Son/Dau

shall be the personal guarantors of the demand

note.

Vincent J Gallo &

Associates,Inc.

Annual Cash Flow

Q S OThe ABC Co.,

Inc

C R T

Deductible

Contribution

Interest

Payment

Income Payment

Vincent J Gallo &

Associates,Inc.

Results..So Far

• Income Tax Deduction

• Creation of a CRT

• Reduction of Estate Tax Liability Basis

• O wner Maintains Corporate Control

• Income for Life – M/M Owner

• Deductible Payments from The ABC Inc. for Owner not Subject to IRC Sec 409A

• Intergenerational Charitable Legacy

Vincent J Gallo &

Associates,Inc.

Based on IRC Sec 72 Joint Life Expectancy Table

M/M Owner will receive Payments for 29 years

CRT

fbo

M/M Owner

The ABC, Inc.Interest Payments of

For Life

to M/M Owner

QSO

Interest

Payments

Vincent J Gallo &

Associates,Inc.

CRT Payments

QSO must pay annually to the CRT the interest on

the demand note. Interest is paid to the CRT. The

CRT, based upon its terms, must pay 7.0% of the

FMV of the trust at least annually to M/M Owner

for their lifetime. The undistributed income each

year (difference between interest income and

payout) results in annually increasing payments

from the trust *. Based upon IRS Mortality Table

estimates, M/M Owner will receive approximately

$4.8 million in income during their lifetime. At the

latter death of M/M Owner no further income will

be paid from the CRT. At that time the principal

amount of the note ($2 million) will be due from

QSO payable to the CRT.

*Alternatively the demand note interest and the CRT payout rate

can be matched

Vincent J Gallo &

Associates,Inc.

How Do We Unwind

This?

• Purchase Survivorship Life

Ins.

• Equal to Liability for Note Buyout

at Second Death

• Son/Dau are Owner/Beneficiary

• $2 Million

• Premium - $24,690 per year

• Subject to medical verification

Vincent J Gallo &

Associates,Inc.

Demand Note Called

At the latter death of M/M Owner the CRT

terminates, per IRC Sec 664. The trustees of the

terminating trust call the principal amount of the

demand note. QSO, lacking the capital ($2 million)

borrows the money from Son/Dau. Son/Dau have

$2 million of insurance proceeds available and, in

turn, lends $2 million to QSO for a demand note of

$2 million with a suitable interest rate. QSO

redeems the note to the CRT with the proceeds

from the loan form Son/Dau.

CRT terminates and pays remainder to QSO.

$2 million from CRT is transferred to Qualified

Support Organization(QSO). Son/Dau are

appointing trustees of QSO.

Son/Dau begin to receive annual payments from

QSO for interest on demand note. Note is insured

w/ issue as beneficiaries and guarantors of note

Vincent J Gallo &

Associates,Inc.

Estate Tax Benefits

• Value of remaining stock held

by Mr. Owner reduced in

value due to $2million liability

on balance sheet

• $2 million removed from

estate of M/M Owner

• Estimate of tax savings $1.5+

million (based on 2004 Estate Tax

Rates and Rules)

Vincent J Gallo &

Associates,Inc.

Benefits of Plan

• Current Income Tax

Deductions

• Reduction in Taxable Estate

• Multi-Generational Succession

Plan

• Multi-Generational Retirement

Income

• Family Philanthropic Legacy

Vincent J Gallo &

Associates,Inc.

Family Benefits

• Mr. Owner retains control

of ABC, Inc. through lifetime

• Transfer of ABC, Inc. within

family in controlled manner.

• Successor generation planning

begun

• Support Organization

Dynastic Benefit

Vincent J Gallo &

Associates,Inc.

Summary of Results

• Current Income Tax deductions

• Lifetime Income

• Reduced or eliminated Estate

Tax

• Charitable legacy for multiple

generations

• Multi-generational

retirement/succession plan

• Partially deductible cost to

corporation