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K U G L E R

T H E. S Y S T E M. K U G L E R. The Continuing Usefulness of GRATs. Presented by: Frank L. Rainaldi, CLU, ChFC. Analysis of Long Term Maximum Annuity GRAT Calculation. Initial Value of Asset Transferred to GRAT $1,000,000. Present Value of $93,342 15-year Annuity

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K U G L E R

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  1. T H E S Y S T E M K U G L E R The Continuing Usefulness of GRATs Presented by: Frank L. Rainaldi, CLU, ChFC

  2. Analysis of Long Term Maximum Annuity GRAT Calculation Initial Value of Asset Transferred to GRAT $1,000,000 Present Value of $93,342 15-year Annuity $1,000,000 Present Value of Remainder Interest $0

  3. Taxable Gift Calculation for Term Certain GRAT Initial value of asset transferred to GRAT Present Value of 15-year $96,342 annuity interest retained by Grantor Present value of remainder interest $1,000,000 (1,000.000) Gift $0

  4. Taxable Gift Calculation for Term Certain GRAT Initial value of asset transferred to GRAT Present Value of 15-year $96,342 annuity interest retained by Grantor Present value of remainder interest $1,000,000 (1,000.000) Gift $0 Taxable Gift Calculation for Reversionary GRAT Initial Value of 15-year $96,342 annuity interest retained by Grantor Less Discount for probability of Grantor (age 55) dying during 15-year period Present Value of Grantor’s retained annuity interest Present value of remainder interest $1,000,000 (73,173) 926,827 Gift $73,173

  5. GRAT Hypothetical Illustration #5 Less: Annuity Payment ($96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) Plus 5% Appreciation $50,000 47,683 45,250 42,695 40,013 37,196 34,239 31,134 27,874 24,450 20,856 17,081 13,118 8,957 4,588 Beginning Balance $1,000,000 953,658 904,998 853,906 800,259 743,930 684,784 622,681 557,472 489,004 417,112 341,625 262,364 169,140 91,755 Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Ending Balance $953,658 904,998 853,906 800,259 743,930 684,784 622,681 557,472 489,004 417,112 341,625 262,364 179,140 91,755 (0) Annuity Payment: $96,342 Assumed Appreciation Rate: 5%

  6. GRAT Hypothetical Illustration #6 Beginning Balance $1,500,000 1,430,486 1,357,497 1,280,859 1,200,388 1,115,894 1,027,176 934,021 836,209 733,506 625,667 512,437 393,546 268,710 137,632 Plus 5% Appreciation $75,000 71,524 67,875 64,043 60,019 55,795 51,359 46,701 41,810 36,675 31,283 25,622 19,677 13,435 6,882 Balance Prior to Annuity Distribution $1,575,000 1,502,011 1,425,372 1,344,902 1,260,408 1,171,689 1,078,534 980,722 878,019 770,181 656,951 538,059 413,223 282,145 144,513 Less: Annuity Payment ($96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) Principal Distributed For Annuity (144,513) (144,513) (144,513) (144,513) (144,513) (144,513) (144,513) (144,513) (144,513) (144,513) (144,513) (144,513) (144,513) (144,513) (144,513) Ending Balance $1,430,486 1,357,497 1,280,859 1,200,388 1,115,894 1,027,176 934,021 836,209 733,506 625,667 512,437 393,546 268,710 137,632 (0) Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Annuity Payment: $96,342 Assumed Appreciation Rate: 5%

  7. GRAT Hypothetical Illustration #7 Shortfall ($20,217) (19,473) (18,649) (17,738) (16,730) (15,615) (14,382) (13,018) (11,509) (9,840) (7,994) (5,952) (3,694) (1,196) - Ending Balance $1,514,674 1,530,905 1,548,859 1,568,718 1,590,685 1,614,983 1,641,860 1,671,589 1,704,473 1,740,847 1,781,081 1,825,584 1,874,811 1,929,262 1,988,708 Plus 5% Income ($76,125) (76,870) (77,693) (78,605) (79,612) (80,727) (81,960) (83,324) (84,833) (86,502) (88,348) (90,390) (92,648) (95,147) (97,910) Beginning Balance $1,500,000 1,514,674 1,530,905 1,548,859 1,568,718 1,590,685 1,614,983 1,641,860 1,671,589 1,704,473 1,740,847 1,781,081 1,825,584 1,874,811 1,929,262 Plus Appreciation $45,000 45,440 45,927 46,466 47,062 47,721 48,450 49,256 50,148 51,134 52,225 53,432 54,768 56,244 57,8778 Less: Annuity Payment ($96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) Less Income Used For Annuity Payment (76,125) (76,870) (77,693) (78,605) (79,612) (80,727) (81,960) (83,324) (84,833) (86,502) (88,348) (90,390) (92,648) (95,147) (96,342) Principal Distributed For Annuity Shortfall ($30,326) (29,209) (27,973) (26,607) (25,095) (23,423) (21,573) (19,527) (17,264) (14,760) (11,991) (8,929) (5,541) (1,793) - Annuity Payment: $96,342 Assumed Appreciation Rate: 5%

  8. GRAT Hypothetical Illustration #8 Beginning Balance $1,500,000 1,547,620 1,599,811 1,657,010 1,719,699 1,788,405 1,863,705 1,946,232 2,036,679 2,135,807 2,244,449 2,363,518 2,494,014 2,637,035 2,793,782 Plus 3% Appreciation $45,000 46,429 47,994 49,710 51,591 53,652 55,911 58,387 61,100 64,074 67,333 70,906 74,820 79,111 83,813 Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Less: Annuity Payment ($96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) (96,342) Plus 6.5% Income $98,962 102,104 105,548 109,321 113,457 117,990 122,958 128,403 134,370 140,910 148,078 155,933 164,543 173,978 184,320 Ending Balance $1,547,620 1,599,811 1,657,010 1,719,699 1,788,405 1,863,705 1,946,232 2,036,679 2,135,807 2,244,449 2,363,518 2,494,014 2,637,035 2,793,782 2,965,573 Annuity Payment: $96,342 Assumed Appreciation Rate: 3%

  9. Long Term Maximum Term Certain GRAT Taxable Gift Calculation Initial value of asset transferred to GRAT Present Value of 15-year $96,000 annuity interest retained by Grantor Present value of remainder interest $1,000,000 (1,000,000) Gift $0

  10. Long-Term Maximum Annuity Term Certain GRAT Kugler Family Transfer of “S” Corporation Stock to GRAT Pre-discounted Value $1,500,000 Minority Discount (500,000) Fair Market Value $1,000,000 Year 1 Gift Value $0 Grantor Retained Annuity Trust $1,500,000 “S” Corporation Stock Mrs. K 15 years (term certain) $96,342 Annuity Payout Year 15 Assume 9.5% Investment Return (6.5% income and 3% appreciation) $2,965,573 Remainder Interest Beneficiary Children or Life Insurance Trust

  11. Long Term Maximum Annuity Reversionary GRAT Taxable Gift Calculation Initial Value of 15-year $96,342 annuity interest retained by Grantor Less Discount for probability of Grantor (age 55) dying during 15-year period Present Value of Grantor’s retained annuity interest Present value of remainder interest $1,000,000 (73,173) 926,827 Gift $73,173

  12. Long-Term Maximum Annuity Reversionary GRAT Kugler Family Gift of “S” Corporation Stock Pre-discounted Value $1,500,000 Minority Discount (500,000) Fair Market Value $1,000,000 Year 1 Gift Value $73,173 Grantor Retained Annuity Trust $1,500,000 “S” Corporation Stock Mrs. K 15 years or earlier death $96,3420 Annuity Payout Year 15 Assume 6.5% Investment Return (9.5% income and 3% appreciation) $2,965,573 Remainder Interest Beneficiary Children or Life Insurance Trust

  13. Structuring the GRAT Payout to Correlate to the Income Generated by the Asset Transferred to the GRAT Taxable Gift Calculation Initial value of asset transferred to GRAT Present Value of 15-year $75,000 annuity interest retained by Grantor Present value of remainder interest $1,000,000 (778,474) Gift $221,526

  14. Term Certain Grantor Retained Annuity Trust Kugler Family Gift of “S” Corporation Stock to GRAT Pre-discounted Value $1,500,000 Minority Discount (500,000) Fair Market Value $1,000,000 Year 1 Gift Value $221,526 Grantor Retained Annuity Trust $1,500,000 “S” Corporation Stock Mrs. K 15 years or earlier death $75,000 Annuity Payout Year 15 Assumes Trust Growth Rate 8% (5% Income and 3% Appreciation) $2,759,726 Remainder Interest Beneficiary Grantor’s Children

  15. Structuring the Long-Term GRAT to Providean Increasing Annuity Payout Mr. Kugler Transfer of “S” Corporation to GRAT Year Increasing Annuity Payout 1 $75,000 5 87,571 10 106,287 15 129,004 Year 1 Pre-discounted Value $1,500,000 Minority Discount (500,000) Fair Market Value $1,000,000 Mr. K Grantor Retained Annuity Trust $1,500,000 “S” Corporation stock Gift Value: 0 Year 15 Assume 9.5% Investment Return (5% Income and 5% Appreciation) $2,996,142 Remainder Interest Beneficiary--Grantor’s Children

  16. Structuring an Increasing Annuity Payout to Correlate to the Anticipated Income Generated from a Long-Term GRAT Funded with a Discounted Income Producing Asset Mr. Kugler Transfer of “S” Corporation to GRAT Year Increasing Annuity Payout 1 $75,000 5 87,571 10 106,287 15 129,004 Year 1 Pre-discounted Value $1,500,000 Minority Discount (500,000) Fair Market Value $1,000,000 Mr. K Grantor Retained Annuity Trust $1,500,000 “S” Corporation stock Gift Value: 0 Year 15 Assume 9% Investment Return (5% Income and 4% Appreciation) $2,709,541 Remainder Interest Beneficiary--Grantor’s Children

  17. Comparing a GRAT That Provides a Level Annuity Payout to An Increasing Annuity Payout Based on the Same Assumptions Asset Assumptions “S” Corporation Value $1,500,000 Minority Interest Discount (500,000) Value for Transfer Purposes $1,000,000 “S” Corporation Income 6.5% of $1,500,000 Assumed Annual Appreciation 3% GRAT Assumptions IRS Interest Rate 5% 15 Year annuity payout to provide “zero” gift

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