The Ultimate Transaction | Charitable Remainder Trust | Charitable Lead Trust | SAM/SAL THE ULTIMATE TRANSACTION This is a program that has been in limited use for a number of years. Previously to the attacks on the use of Private Annuities to gain step up basis "The Ultimate Transaction" was primarily used where the client's age prohibited extended deferral. This program uses a number of elements. The purpose of this program is to: Retain control over appreciated assets Gain asset protection for the assets in the program Eliminate estate taxes Eliminate most of the capital gains taxes Possible generation of a tax free stream of cash income Possible leverage of the net value of the assets many times. The elements in the program are: Client Appreciated asset Limited Partnership (FLP) Irrevocable trust Qualified charity (Under certain restrictions, could be a family foundation) Life insurance. Here is how the program works. Step 1 - The client contributes an appreciated asset to a Limited Partnership (FLP). The client receives back from the Limited Partnership (FLP) both Limited Partnership interest and General Partnership interest. (Note this is the one exception where we have a client being a General Partner and this exception is limited to this transaction.) * Step 2 - The client forms an LLC to hold the General Partnership interest. Step 3 - The partnership agreement calls for the General Partner to receive all the growth in the Limited Partnership. Step 4 - The Limited Partnership interest is gifted to a qualified charity. Step 5 - Establish an irrevocable trust (In this case we use an Ultra Trust). The beneficiaries of this trust can be whom ever the client desires including the client. Step 6 - The General Partnership interest is now placed inside the Ultra Trust. Step 7 - As the General Partner of the Limited Partnership (FLP) the client sells the appreciated asset of the Limited Partnership to a third party receiving cash equal to the appreciated value of the asset. The cash from the sale of the appreciated asset flows to the Limited Partnership (FLP) under the control of the General Partner. Step 8 - Since the return to the client is equal to their basis the charity receives a K1 for 100% of the tax due. Because the charity is a qualified 501(c)(3), church, school it pays no tax. Step 9 - The General Partner then invests the total funds received by the General Partnership interest in what ever the General Partner deems appropriate. Further, the General Partner purchases whole life or some other cash life insurance policy that allows the owner of the policy to borrow against the policy. The policy may be many multiples of the Limited Partnership interest however, the death value of the insurance policy must be no less than the value of the Limited Partnership interest on the day the Limited Partnership interest was gifted to the charity. Step 10 - The insurance policy is owned by the trust. If the policy is a cash value policy then Step 11 may be used. If the policy has zero cash value then the next step is Step 12. Step 11 - Optional - The trustee of the Ultra Trust now borrows against the policy and provides a tax free income stream to the original owner of the appreciated asset - the client. Tax free loans from the insurance policy are repaid at the death of the life(s) covered. Step 12 - The balance of the policy amount after the charity receives its fixed amount plus all gains in the trust from investing 100% of the amount received from the sale of the asset go to the client's beneficiaries. * The value of the General Partnership interest is the basis the client has in the appreciated asset. Therefore the General Partnership/Limited Partnership ratio is the same as the ratio of basis to market value. What we have accomplished: We have eliminated the capital gains tax to the extent that the charity is a Limited Partner. We have eliminated estate taxes on the asset plus its growth. We have maintained control of the value of the asset during the life time of the client and perhaps beyond. We have maintained the total control of the growth of the appreciated asset after its sale. We have created a charitable deduction for the value of the Limited Partnership interest. We have created a vehicle where the trust, which owns the insurance policy, may generate tax free income to the beneficiaries of the trust - loans against the policy. The client's estate gains a charitable gift deduction for the value of the Limited Partnership interest.