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South Dakota

AIP Conference on Philanthropy – April 28, 2015 :. Al W. King III, J.D., LL.M., AEP (Distinguished), TEP Co-Chairman & Co-Chief Executive Officer. South Dakota. Trust Company llc. 201 S. Phillips Avenue  Suite 200  Sioux Falls, SD 57104  (605) 338-9170.

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South Dakota

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  1. AIP Conference on Philanthropy – April 28, 2015: Al W. King III, J.D., LL.M., AEP (Distinguished), TEP Co-Chairman & Co-Chief Executive Officer South Dakota Trust Company llc 201 S. Phillips Avenue  Suite 200  Sioux Falls, SD 57104  (605) 338-9170 4020 Jackson Blvd  Suite 3  Rapid City, SD 57702  (605) 721-0630 10 East 40th Street  Suite 1900  New York, NY 10016  (212) 642-8377 (South Dakota Planning Company) www.sdtrustco.com / www.privatefamilytrustcompany.com / www.directedtrust.com

  2. Index: • Charitable giving statistics • Global wealth statistics • U.S. wealth statistics • Increased popularity of trustsdomestically • Modern trust • Directed Trust • Incentive provisions promoting social & fiscal responsibility • UHNW donors • Special Purpose Entities • Private Family Trust Companies • Types of non-charitable trustsutilized for charitable giving: • Existing Change of Situs trust • Dynasty Trusts • Combined with CLT • Cryogenics Trust • Domestic Asset Protection Trust (DAPT) • Non-Charitable Purpose Trust • Personal Residence Trust • HEET

  3. Charitable Planned Giving: “To give away money is an easy matter and in any man’s power. But to decide to whom to give it, and how large and when, and for what purpose and how, is neither in every man’s power nor an easy matter.” - Aristotle “No person has been honored for what he received. Honor is a reward when we give.” - Calvin Coolidge

  4. U.S. Charitable Giving Statistics (i.e. Social Responsibility): • 2013 Annual Charitable Contributions: $335.17 Billion (Giving USA – 2013) • 98.4% of high net worth households give (U.S. Trust) • Average donation: $68,580 • Charitable giving accounted for 2% of GDP (Giving USA – 2013) • Estimated Charitable Giving between 2007-2052 (Boston Colleges Center on Wealth and Philanthropy): • Bequests: $58 trillion • Charitable Bequests: $6.3 trillion

  5. U.S. Charitable Giving Statistics (i.e. Social Responsibility): • Charitable Motivation (US Trust): • 74% “gift can make a difference” • 73% “personal satisfaction” • 66% “supporting save causes annually” • 63% “giving back to community” • 62% “serving on non-profit Board or volunteering” • 34% “tax advantages” • Where Contributions Go (US Trust): • 85% Educational organizations • 81% Charities that may help basic needs • 70% Culture & humanities • 67% Religious organizations • 67% Health organizations • Number of Family Foundations has increased to over 38,600 in 2010 giving more than $20.6 billion (The Foundation Center): • 1/3 of these Family Foundations have been created in the 2000s

  6. Top Twenty States for Millionaires($1MM Investable) State# of MillionairesMedian Household IncomeCharitable Giving Rating: California 777,624 (Population 38.8MM, 2%) 15th 40th Texas 456,949 26th 12th New York 429,153 24th 28th Florida 348,623 36th 18th Illinois 270,414 16th 35th Pennsylvania 265,350 23rd 41st New Jersey 242,647 8th 48th Virginia 208,187 3rd 30th Ohio 204,121 38th 32nd Massachusetts 174,225 7th 46th Source: Phoenix Marketing International; Census Burea, 2013 Population Survey; Chronicle of Philanthropy  analysis of Internal Revenue Service data 6

  7. Top Twenty States for Millionaires($1MM Investable) - Cont’d State# of MillionairesMedian Household IncomeCharitable Giving Rating: Michigan 169,991 35th 23rd Maryland 169,287 4th 22nd Georgia 163,144 37th 5th North Carolina 158,447 47th 10th Washington 155,668 13th 33rd Minnesota 118,410 11th 39th Colorado 113,914 5th 31st Arizona 108,682 31st 24th Wisconsin 106,647 19th 43rd Missouri 106,390 33rd 19th Source: Phoenix Marketing International; Census Burea, 2013 Population Survey; Chronicle of Philanthropy  analysis of Internal Revenue Service data 7

  8. Global Wealth –Wealthy Countries: Source: BCG Global Wealth Market-Sizing Database 2014

  9. Global Wealth Transfer - IntergenerationalPlanning: • Next three decades world’s ultra high net worth (UHNW) bequeath $16 trillion globally: • $6 trillion U.S. • Germany, Japan, U.K. and Brazil (next largest wealth transfers) • $300 billion charitable globally • Perspective: Current U.S. GDP just under $17 trillion • Transfer from .3% of world’s population • 68% - Self-made globally • Richest 1% own 50% of global wealth Source: U.S. News & World Report

  10. U.S. Wealth Statistics: • U.S. Private wealth – Expected to reach: • $54 trillion by 2018 • Up from $46 trillion in 2013 • Top 1%  40% of wealth: Closely-held business and/or real estate • 64 million over age 50 control $20 trillion of wealth in the U.S. • China will ranksecond with $40 trillion Source: Euromoney

  11. U.S. Income, Net Worth, and Financial Worth by percentile: Please note: Figures above in 2010 dollars Source: Wolff, E. N. (2012). The Asset Price Meltdown and the Wealth of the Middle Class. New York: New York University.

  12. U.S. Wealth distribution by Type of Asset: Please note: Figures above based on 2010 US Census Source: Wolff, E. N. (2012). The Asset Price Meltdown and the Wealth of the Middle Class. New York: New York University.

  13. U.S. IntergenerationalPlanning: • Key group #1: • 66.3%population below age 50 • 77 million Baby Boomers (Born 1946 - 1964) • Make up roughly 13% of population • Roughly 4 million Baby Boomers retire each year • 10,000 per day • Key group #2: • 64 million people over age 50 control $20 trillionwealth • “Leave family enough money so they do something; not leave enough money so they do nothing.” - Warren Buffet • Bothgroups very interested in estate planning and trusts Source: US Census

  14. Defining Core and Excess Capital – How Much to Give?: Goals for Wealth Allocation Strategy Transfer Strategy Lifestyle Spending • Invest for security • Balanced mix of liquid traditional asset classes • Minimum amount that must always remain in the estate(trust) Core Capital Emergency Reserve Children • Amount that can safely be transferred out of the estate(trust) • Incentive trust assets to promote fiscal & social responsibility Grandchildren • Invest more aggressively • Tailor allocation to the risk profile of the beneficiaries Excess Capital Great-Grandchildren Charity Source: AllianceBernstein

  15. U.S. Transfer Schedule:A projected 75% of baby boomer assets are to be handed down to their kids between 2024 and 2046. 25% 50% 75% 100% 100% 80% Percent of Assets Transferred 60% 40% 20% 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 Source: Registered Rep Magazine/Cerulli Associates

  16. Summary of the Most Popular Desires of an UHNW Person’s Domestic Trust Planning: • Family Governance/Involvement, Education, andSuccession • Control and Flexibility: (“Directed” Trusts/Trust Protectors and/or Private Family Trust Companies): • U.S. taxpayers reported making $122 billion in nontaxable gifts in 2012 (Bloomberg) • According to the IRS in 1995, traditionally only 12.5% of all gifts were to trusts (changed dramatically) • “Trusts are no longer vehicles that lawyers and banks create to keep what is rightfully the beneficiaries.” • “Directed Trusts”, “Special Purpose Entities” and “Private Family Trust Companies” • Investment Planning: (Control & Flexibility) • Modern Directed Trust with family investment committee: • “I am not so concerned with the return on my money as the return of my money” – Mark Twain • Principal & Income; Current vs. remainder beneficiaries • Proper asset allocation – “directed trust” • Ability to hold one asset without asset diversification – “directed trust” • Illiquid assets – Directed trust 16

  17. Summary of the Most Popular Desires of an UHNW Person’s Domestic Trust Planning (cont’d): • Privacy: Litigation, all court matters, keep trust silent to beneficiaries if desired • Asset Protection: (Self Settled Trusts, Third Party Beneficiary Trusts, Discretionary Interests, LLCs/FLPs) – Both settlor/grantor [and] beneficiaries • Tax Savings: (Estate, GST, State Income and Premium Taxes) • Family Management: Promotion of Social and Fiscal Responsibility: • Modern “Directed” Dynasty incentive trusts: • “I want to leave my family enough money so they do something; not leave enough money so they do nothing.” – Warren Buffet • Remember names and values of great great grandparents • Videotape of family values and goals (transcribe) • Draft Family Mission Statement • Solution: Modern Directed Trust • Four Levels of Asset Protection: • Self-Settled Trust Statute: • The settlor has the ability to name him or herself as a trust beneficiary of a discretionary trust along with other permissible beneficiaries. • LLC or LP: • Assets located in other states are titled to a LLC or LP, which in turn is titled to a self-settled DAPT. Select states offer “sole remedy charging order” protection to LLCs and LPs which is generally considered the most desirable. • Discretionary Interests: • A discretionary interest in a trust is not a property interest in some states.Additionally, limited powers of appointment and remainder interests are not property interests. • Spendthrift Clause: • A spendthrift clause also helps prevent creditors from attaching to a trust providing another level of protection. 17

  18. Modern Trusts and Trust Administration - Family Value Planning Promoting Social & Fiscal Responsibility: • Family goals vs. Philanthropic goals: • Family goalsarenot the sameasphilanthropic goals • Successful philanthropycanreinforce family values andstrengthen a family legacy • Promote social and fiscal responsibility via trusts: • Passing values and life lessons is considered the most important legacy by more than 75% of baby boomers and their parents (New York Times) • Promoting social responsibility (successful philanthropy): • Charitable: • Private foundations • Donor advised funds • Charitable trusts (CRT, CLT) • Non-charitable: • Dynasty Trusts • Incentive trust • Promotes both fiscal and social responsibility • Other non-charitable trusts: • Any trusts with children and/or grandchildren as discretionary beneficiaries Source:Arabella – Philanthropic Investment Advisors 18

  19. Modern Directed Trusts Provide Powerful Social and Fiscal Responsibility in Charitable Giving: “Trusts are no longer vehicles that lawyers and banks create to keep what is rightfully the beneficiaries'” • Trusts created with “open architecture” • Collaborative relationship among beneficiaries and trustee • Multipletrustees/fiduciaries and managers assume duties once assigned to single trustee • Specialization of function (investments, distribution, custody, administration/accounting) • Active family involvement

  20. Typical ModernDirected Trust Structure with a Trust Protector Promoting Flexibility and Control: Trust Protector (Family, Friends or Advisors) (Fiduciary, Not Trustee) • Powers include: • Terminate the trust; • Modify or reform the trust; • Veto or direct trust distributions; • Add or remove beneficiaries; • Change situs and/or governing law of the trust; • Appoints successor trustees & fiduciaries; • Replaces trustees and fiduciaries. Distribution Committee (Fiduciary, Not Trustee) • Administrative Trustee • (i.e., Sitused in AK, DE, NV, SD, etc.) • Ownership of assets • Establish & maintain trust bank account • Prepare & sign trust tax return • Trust statements • Make distributions • Receive contributions • Take direction from: • Investment Committee • (Family & Family Advisors) • (Fiduciary, Not Trustee) • Directs Administrative Trustee • Re Investments • Stocks & bonds • Insurance • Art • FLPs • LLCs • Real estate • Private equity • Closely-held stock Directs Administrative Trustee Re Distributions Independent Committee Family Committee (Non-tax sensitive distributions) Investment Committee (Tax sensitive distributions) Distribution Committee *Combine all functions è Full Trustee 20

  21. Modern Directed Trusts: • “Directed” Trustee– Trifurcates the traditional trustee role into an investment committee, distribution committee and a directed administrative trustee: • Section 185 2nd Restatement of Trusts – the directed administrative trustee is generally not liable for following the instructions of an empowered person (i.e., investment and/or distribution committees) within the trust instrument – State Statutes. • The administrative trustee has no discretionary investment (3rd party) duties regarding the trust. The selection of investment managers is generally the responsibility of the investment committee run by the family. • The administrative trustee takes direction from the investment committee and the distribution committee respectively regarding both investments and distributions. • State statutes and the trust documentprotect the administrative trustee from taking direction for investments and/or distributions. Typically “gross negligence and willful misconduct statutes”. • Please Note: Some advisors utilize “directed” trust language without state “directed” trust statutes (not as powerful). • Great combination of independent administrative trustee, family, friends and family advisors • Provides flexibility and control regarding investments and distributions • Liability Protection: Gross negligence/willful misconduct standard for liability of family members serving as co-fiduciaries • State Statutes – Not all states have directed trust statutes (i.e., Alaska, Delaware, Nevada, New Hampshire, South Dakota and Wyoming) 21

  22. Typical Trust Protector Powers (Vary by State Statute): Future Circumstances Drafting • Flexibility • Personal vs. fiduciary powers • No personal gain, duty of loyalty & impartiality, actions for good of trust & beneficiaries • Power to remove or to replace trustees • Power to veto or direct trust distributions • Power to add or remove beneficiaries • Power to change situs and the governing law of the trust • Power to veto or direct investment decisions • Consent to exercise power of appointment • Amend the trust as to the administrative and dispositive provisions • Approve trustee accounts • Terminate the Trust Selected States with Trust Protector Statutes: 22

  23. Inheritance: • Percent who consider it important to leave inheritance to children/heirs: • 76% (younger ages 18-46) • 55% (Baby Boomers) • 73% (older age 67+) • One in three Baby Boomers (31%): Rather give money to charity • Twice as many as younger ages 18-46 • Twice as many as older ages 67 plus • 61% of high net worth parents are not confident children are: • Well prepared to handle financial inheritance • 33% of wealth parents: Have disclosed their wealth to their children • 50% believe children mature enough 25-34 years old • 25% believe children mature enough 40 years old • Source: U.S. Trust study

  24. Designing the Incentive Family Bank Dynasty Trust: • Incentive Trust Defined: Trusts with provisions designed to encourage or discourage certain types of behavior. • Trying to helpbeneficiaryrecognize some aspect of what got grantor to where they got so that some aspect of grantor’s heritage can be valued and perpetual (Calibre). • Leave kids enough so they do something, but not enough so they do nothing - Warren Buffet • Remember values and names of great-grandparents • Promoting social & fiscalresponsibilitywithin the family (family values) • Best: If “Directed” regarding trust administration and discretionary regarding distributions • Family and family advisors: Distribution committee (mentors) • Key Ages for Beneficiary Development: 20-40 • Generally: post age 40 retain trust for tax savings, asset and divorce protection, etc. 24

  25. Designing the Incentive Family Bank Dynasty Trust (cont’d): • Various trust distribution options: • Mandatory Distribution Standards(poor option for incentive trusts): • All income distributed • 1/3 of principal age 25, 1/3 age 30, balance 35 • Discretionary Support Interest: • Health, Education, Maintenance and Support (HEMS) distributions (not best option for incentive trusts) • Total Discretionary Trust: • Total discretion: best option for incentive trusts • Successful children become members of distribution and investment committees as well as mentor • Separate shares vs. single pot: • Unequal distributions with single pot – Could negatively impact family relationships • Competition for single pot may breed animosity and distrust • Solution – separate shares with LP of A (once distributions begin) • Reform/Modify or Decant existing trust with mandatory and/or discretionary support provisions • Total discretionary 25

  26. Family Lines Trust/Separate Shares: • Trust divides along family lines (Separate Shares); • Possibly – Continue to divide every generation or two • Family appoints investment and distribution committee members as well as trust protectors familiar and loyal to family line • Reduces conflicts • Many divide into equal shares for each of the grandchildren: • Rather than children (children are frequently adults and may not need it or may have other sources of inheritance) • Due to GST aspects of the trust • Alternatively, many divide the trust upon the death of the survivor of the client and their spouse: • Equal shares to children (living and those previously lived with children of their own) • Possibly tie division to all of children attaining age 60

  27. Designing the Incentive Family Bank Dynasty Trust: • Motivation: • ExternalMotivation:(act done for outward reward or fear of failure) • InternalMotivation(act done for its own sake and because they enjoy it, i.e. enthusiasm and passion) • Motivation Summary: • Want motivation to come from inside not be supplied from outside; • Money and material goods are external and happiness is internal; • Training process for families; • Handing down values can be achieved in a more positive, less threatening manner through charitable endeavors (Calibre); • Goethe Quote: “Treat a man as he is and he will remain as he is; treat a man as he can and should be, and he will become as he can and should be.” • Works best with family distribution committee in a Directed Trust 27

  28. Designing the Incentive Family Bank Dynasty Trust (cont’d): • IRSpermitscharitable deduction for distributions made from non-charitable trusts to charity • Needmandatorydirection or discretionarypower to pay funds to charity from the trust • Power of Appointment: PLRS allow charitable deductions amount paid to charity • Pursuant to exercise of Power of Appointment • Includes charity as permissible appointee • Regs under IRS § 642 – Deals with what trust income is allocated to charitable deduction • Possible issue: IRC § 681 Unrelated business income

  29. Sample Incentive Provisions for Directed Trusts: • Promotion of Fiscal Responsibility: • Draft family mission statement [and] videotape family goals (transcribe); • Incentive Clauses (i.e. $2 of trust income for each $1 of W-2 income) – exceptions, i.e. disability; • Distribution audit to determine suitability of future distributions – Cap distributions based upon beneficiaries’ net worth indexed for inflation; • Assumption $7.5MM enough to live well, but have to protect it (Financial Counsel). • Supplemental income for socially responsible profession, i.e. artist, musician, teacher, etc; • Monthly Stipend for stay at home parent, also adult child to care for elderly relative; • Education costs for family in perpetuity; • Lump sum received at college graduation and/or advanced degree(s) (depending upon quality, academic rigor and college reputation); • If stipulate 3.0 GPA, may choose easier courses. • Monthly payments for Academic Excellence ; • Medical costs for family in perpetuity; • Real Estate – “Use Factor”: buy real estate for children, grandchildren within the trust and they “use” it tax free (operates as Family Time Share); • Clause to encourage descendants to stay in marriage while the children are minors – “vest” extra in trust; • Clause to encourage descendants to get married (wait until certain age, marry right person, etc.); • Divorce protection; • Floating Spouse Clause (in-laws): define in-law spouses as “spouse I am married to and living with”; • Deny trust payments unless beneficiary has a prenuptial agreement; • Beneficiary conflict clause – if beneficiary sues, they get nothing; • Denial of distributions if beneficiary fails a drug test or psychological treatment; • Family Bank: Loan to Beneficiary (term insurance purchased to provide repayment); • Denial of distributions if beneficiary does not participate in family meetings re charitable giving, family investments, estate planning and trusts. 29

  30. Sample Incentive Provisions for Directed Trusts (cont’d): • Promotion of Social Responsibility: • Successful philanthropy can reinforce family values and strengthen a family legacy • Prepare written document or transcribed videotapeillustrating charitable desires, goals, values and purpose (i.e. mission statement); • As part of trust or as letter of wishes • Get buy in from family, advisors and distribution committee • Education – develop a family learning plan, family/distribution committee meetings, site visits to charities, advice from other philanthropists • Governance – distribution committee made up of family members (i.e., service members and junior members; possibly hire outside charitable advisor consultants) • Direct or indirect: Require trust make distributions to charitynamed in the trust [or] permit beneficiaries to selectcharities under guidelines outline in the trust (i.e., research and community involvement) • Participation: Require beneficiary to actively participate in charity if they want distributions made • Control over donations: If want beneficiaries to have control over distributions, the trust’s distribution committee directs that distributions be made to private foundations, donor advised funds, community foundations, supporting foundations, etc. • Charitable donations by family in perpetuity once dynasty trust attains a certain FMV: • The family distribution committee makes donations from the trust directly to charity, thus actively involving the family with charities and thus promoting the family values and mission statement • If beneficiary fails to meet trust performance standards, then funds divert to charity • Child works for charity, family foundation, or volunteers – Supplement Income • Encourage giving: Provide for trust to make matching distributions to beneficiaries equal to the percentage of charitable contributions they make each year. • Limited powers of appointment/separate shares (charitable giving option) • Charity gift over 30

  31. New Approach to Family Bank Dynasty Trust Incentive Provisions – Providing Guidelines for Trustee Discretion: Family distribution committee makes distribution based upon following factors: • The ability to live within one’s means, i.e., managing spending consistent with one’s level of income; • The ability to manage spending relative to incomein a manner that would be consistent with being able to save a portion of income, as needed; • The ability to understand and manage credit and debt processes, leading to avoidance of excessive debt; • The ability to maintain reasonable accountingof one’s financial resources; • The ability to understand and manage one’s personal assets, either using basic investment procedures and principles oneself or to delegate these actions responsibly to appropriate advisors; • The ability to generate income for spending needsif additional resources are required or desired beyond trust distributions; • The ability to show initiative, engage in entrepreneurship, and demonstrate purpose in paid or unpaid work. • The ability to use of a portion of one’s income and/or financial resourcesto support charitable activitiesof one’s choosing; and Source: Heckerling 2011- “Use and Abuse of Incentive Trusts: Improvements and Alternatives” Jon & Eileen Gallo and James Grubman Ph.D. 31

  32. UHNW Charitable Giving/10 Most Generous U.S. Donors – 2015: • Philanthropy 50 list (America’s top donors): • Donations increased 27.5% in 2014 • $9.8 billion donations in 2014 • Median age 73 • Eight people under age 50 • Donors under age 40 – generally put money into foundations or other endowments for later distributions 32

  33. 10 Most Generous U.S. Donors – 2015 (cont’d): 33

  34. Gates Foundation Study: • “Of all the classes, the wealthy are the most noticed and the least studied.” – John Kenneth Galbraith, Economist • Gates Foundation is co-funding study: • Largest and broadest survey of American wealthy ever conducted • Targeting households with net worths of $25M or more • Aims for 1,000 respondents • Study is called “The Joys and Dilemmas of Wealth” • Probe: Family values, philanthropy, religion, happiness • Study will explore hearts and minds of wealthy, not just their financial plans. • Purpose of Study – “To boost charitable giving” • Understanding motivation will help non-profits properly target • Also highlights the charitable motivations behind philanthropy

  35. Gates Study Sample Questions: • Describe the best thing you have done with your wealth so far? • Describe the biggest mistake you have made with your wealth so far? • Please indicate the level of change in the world you see yourself accomplishing over the course of your life: 0 minor to 10 major? • What is the minimum level of net worth you would need to feel extremely secure? • How would you describe your ultimate goal of deepest aspiration for your children or primary heirs? How does your wealth help accomplish this? How does your wealth get in the way? • Taken all together, how would you say things are these days? Would you say that you are very happy, pretty happy, or not too happy?

  36. Special Purpose Entity (SPE) or Trust Protector Company (i.e., Delaware, Nevada, New Hampshire, South Dakota & Wyoming) (Combined with Separate Investment Management LLC): Typical South Dakota Example: Special Purpose Entity (South Dakota LLC) Directed Trust • Directs: • Trust Protector • Investments: • Directs directed administrative trustee to hold investment management LLC • Distributions: • As determined, usually discretionary South Dakota Trust Company- Administrative Directed Trustee • Board of Managers • Trust Protector • Investment Committee • Distribution Committee • Directed Trust • Administrative Trustee • Unique South Dakota SPE Statute • Not a trust company • Registers with the South Dakota Division of Banking • D&O, E&O Insurance • More ties to South Dakota situs • Meetings outside client’s resident state • Governance Trust assets South Dakota Investment LLC (South Dakota Trust Company – Member) (Family members or other – Manager) Investment Management • Trust protector, investment committee and distribution committee are housed in an LLCacting as agents or employeesof the LLC to further tie the trust to the favorable situs state and reduce their liability by purchasing insurance (D&O) as well as providecontinuity. • Other states: Delaware Trust Protector company, Nevada and Wyoming (all less formal, and case-by-case) 36

  37. Trust Protector Company or Special Purpose Entity (i.e., Delaware, Nevada, New Hampshire, South Dakota & Wyoming): Trust Protector Company or Unregulated Special Purpose Entities: The Trust Protector Company or the unregulated Special Purpose Entity alternative is generally used in combination with the "directed trust" structure. A recent trend is to establish unregulated entities such as a limited liability company to place a liability umbrella over the heads of the individuals filling the roles of Trust Protector, Investment Committee and/or Distribution Committee. Example: Trust Protector Company/ Unregulated Special Purpose South Dakota LLC • Serves the role of: • Trust Protector; • Investment and/or Distribution Committees • [And] • Provides liability protection through D&O/E&O to independent • advisors serving the family in these roles. • It is very difficult, if not impossible, to acquire individual liability insurance coverage to serve as committee members and/or trust protector. However, some insurance companies will provide coverage to an entity established specifically for these purposes, thus protecting the trust protector and committee members. Such an entity would also provide legal continuity of its corporate existence by continuing without regard to any single individual’s death, disability or resignation. The entity typically has by-laws that allow for additional members to be added or removed so that the entity can continue along with the trust. These entities have to be properly structured so as to avoid estate tax inclusion issues. Delaware, Nevada, and Wyoming also allow on a case by case basis. These entities are generally exempt from regulated Private Trust Company status and are typically special purpose type entities with limited defined duties. 37

  38. Private Family Trust Companies (PFTC) - Introduction: • A growing and populartrend among ultra wealthyfamilies is the creation of their ownPrivate Family Trust Company (PFTC)to serve as trustee for their trusts: • Generally LLC authorized by state law to operate as family trust company • Popular PTC states: South Dakota, Nevada, Wyoming and New Hampshire • South Dakota: Industry leader for regulated family trust companies • SDTC is the leader in the set up, operation and administration of PFTCs • Example – South Dakota: $200k capital and $75-100k total set up costs • When does a familycreate a Private Family Trust Company: • Family members and advisorsarenamed as trustees for family’s trust(s) with personal liability – PFTC provides D&O/E&O insurance • Familiesexperiencingissues with bank/institutional trustees • Allows for a sophisticated asset diversification model (i.e., Yale Endowment, FOX, IPI) • Illiquid assets in trust (i.e. closely-held stock, real estate, oil & gas interests, gambling interest, etc.) • Provide flexibility to not have to diversify, i.e., ability to hold one asset in trust • Governance • Privacy • SEC exemption: Common trust funds & business trusts 38

  39. Example: Typical Modern PFTC – Promoting Flexibility and Control: Non-South Dakota Family Office Subsidiary South Dakota Private Family Trust Company (SD LLC) Corporate Agent Service Agreement SDTC South Dakota Board Member Distribution Committee Investment Committee Administrative Trustee SDTC as PFTC trustee agent providing back office trust administration Family Independent • Step 1: Form a SD LLC and apply to SD Division of Banking to be a PFTC • Need office in South Dakota, one SD Board Member, and a SD Corporate Agent – SDTC sits on the board and serves the role as corporate agent i.e. providing office space to PFTC, collecting mail and answering the phone, service of process. • Step 2: South Dakota PFTC leases services from FO in another state. • Step 3: Trust administration can be done in South Dakota to benefit from South Dakota’s favorable trust laws by hiring SDTC as trustee agent for PFTC [or] administration can be done in another state (interstate administration allowed) by family office and its advisors. The latter will not garner the benefits of South Dakota trust and tax laws. 39

  40. “Cradle to Grave” Charitable Giving with Non-Charitable Trusts: • Existing Non-Charitable trust: Change trust situs • Incentive Trusts/Family Values: Modern Dynasty Trust – Promotion of Social Responsibility within the Family (non-tax provisions): • Flexibility – “Directed Trusts” • Dynasty Trust combined with Charitable Lead Trust • Cryogenics Trust: Dynasty Trust (“People who never want to die setting up trusts that never end”) • Self-settled Domestic Asset Protection Trust • Purpose Trust: • Pets • Honorary grave sites • Art • Philanthropic purpose not qualifying for charitable deduction • Personal Residence Trust • Education Trusts: HEET Trusts • Miscellaneous

  41. Change of Trust Situs (Existing Trust): • Step 1: Substitute current trustee with trustee located in modern trust jurisdiction • Step 2:Procedure: • Reformation/modify trust in court (see appendix A) • [or] • Decant from old trust to new trust in modern trust jurisdiction (see appendix A) • Add: • Directed Trust provisions (distribution committee) • Incentive provisions (promoting social & fiscal responsibility) • Trust Protector • Special Purpose Entity • Charitable distribution provision • Add powers of appointment – Ability to appoint charity • Beneficiary quiet provision: Ability to keep the trust quiet/silent to beneficiaries and ability to waive beneficiary notice of trusts assets • Privacy protection – For all court matters • Remove: • Mandatory (i.e., pay all income and/or pays 1/3 principal at age 25, 1/3 at age 30 and 1/3 at age 35) and/or support (HEMS) distribution provisions • Add discretionary trust provisions

  42. Directed Dynasty Trust (Perpetual Unlimited Duration or Long Term – Alaska, Delaware, Nevada, New Hampshire, South Dakota & Wyoming): • Generation Skipping Trust: Unlimited or long term duration • Utilize $5.43mm federal gift and generation skipping transfer tax exemptions – shift all $5.43mm and all future growth out of estate • Saves federal and state death taxes • Saves state income/capital gain taxes in perpetuity • Distributions taxed to beneficiaries • Provides added asset protection of trust assets (vs. Florida – see Casselberry case) • Flexibility & control: Regarding trust investments and distributions (directed trust) • Promote social and fiscal responsibility with family • Also Trust Protector • Added privacy: • Courts: • Trust litigation • Court reformation/modification • Court blessed decant • Beneficiary quiet statutes: • Keeps trust quiet to beneficiaries if desired • Low premium taxes: AK -10 bpts; SD - 8 bpts; DE, NY, CA, NJ – 200 bpts; CA – 235 bpts; NV – 350 bpts • Private Placement Life Insurance (PPLI) - Avoids federal & state income taxes • Zero tax Dynasty Trust

  43. Generation Skipping Transfer (GST) Trust and Dynasty Trust States: *** Generally place real estate in LLC, hence subject to unlimited duration • * Eight states follow the Murphy case in whole or in part re the method for abolishing their RAP by dealing with both the required “vesting” and “timing” issues associated with the RAP. The IRS acquiesced in the Murphy case, which allows for an unlimited trust duration. • ** Please note the term states do not address both the required vesting and timing issues associated with the RAP and the IRS may only recognize 90 years. No authority for the term states to arbitrarily choose a term extending the 90 year statute. 43

  44. Dynasty Trust – Enormous Size Potential: • Assumptions - $5.43 million Gift to Trust; Trust lasts 150 years and earns 3% after- tax; 46% transfer tax every 30 years • Three Generation GST Trust (Common Law RAP or USRAP)- $74,199,681 • Dynastic trust (unlimited duration/perpetual or long term)- $471,216,794 44

  45. Leveraging the Dynasty Trust – Promissory Note Sale to a Defective Grantor Dynasty Trust: • Sale to a defective grantor Dynasty Trust • In Exchange for the trust’s Promissory Note with periodic interest payments (at least annual) for a period of years with single balloon payment of principal at end of period • Promissory Note is secured by trust assets sold to the trust and authorizes repayment of principal without penalty • Trust excluded for estate tax purposes, so income and principal are taxed to grantor(Revenue Ruling 85-13): • No gain or loss on sale to trust • Grantor not taxed separately on interest payments of the Note • Estate tax savingsif trust has a total net return in excess of note interest rate • Outstanding Promissory Note: • Included in grantor’s estate (discount?) – Buy term life insurance • Self Canceling Installment Note (SCIN) – Note cancels at death (not included in grantor’s estate) 45

  46. Promissory Note Sale – Dynasty Trust Leveraging Strategy: • Dynasty Trust • $5.43MM Initial Gift • Growth on Initial $5.43MM Gift • Growth on $48.87MM Promissory Note in excess of 1274 rate for 9 years • Gifts $5MM • Allocates $5.43MM of Gift Exemption • Allocates $5.43MM of GST Exemption (2015) • Promissory Note Sale of Assets to Trust • Up to 9 times $5.43MM funding amount (or $48.87MM) • Note Term: 3-20 years (Generally 9 years) Grantor • Interest Only Balloon Note Back to Grantor • Interest for 9 Years (Not Taxed) • Interest based upon IRS 1274 Rates (1.70% Feb 2015) • Balloon Principal Payment in Year 9 of $48.87MM • Initial Gift and Growth remain in trust after balloon note payment, • for beneficiaries; possibly fund another Promissory Note Sale Please Note:If married, it is possible to make an initial gift of $10.86MM and therefore a $97.74MM Promissory Note or if maximize current Gift and GST Exemptions up to $5.43MM per spouse resulting in a $48.87MM Note for one spouse Beneficiaries 46

  47. Dynasty Trust – Enormous Size Potential with Leveraging via the Promissory Note Sale to Defective Grantor Dynasty Trust: • Assumptions: • $5.43 Million Gift to Trust- 150 Years • $48.87 Million Promissory Note- Post Discount ($69,814,286) (30% Discount) • 9 YR Note- 1.70% Mid Term Rate (Feb 2015) • 40% Estate Tax Rate (30 Years Per Generation) • 3% After Tax Return *Does Not Include State Income Taxes 47

  48. Dynasty Trust: • Directed Trust: Distribution Committee • Family & family advisors mentor younger family members • Promote social & fiscal responsibility • Incentive provisions • Charity distribution provisions • Power of Appointment: Appoint to charity • Separate shares versus single pot trust: • Each separate share: Power of appointment • Do not have to leave in trust of other separate shares upon death or before • Beneficiary quiet statute: Keep trust silent from beneficiaries • Charitable gift over

  49. Dynasty Trust with No Heirs: ½ Descendants of Donor’s mother (Siblings & their descendants) ½ Descendants of spouse’s mother If None _Charity • Delineated in Document • If not around or unqualified_trustee selects

  50. Charitable Lead Trust (CLT) Combined with a Dynasty Trust: How does it work? Assets Charitable Lead Trust Donor Income $ Term of Years Remainder • Dynasty Trust: • Promoting social & fiscal responsibility • Charitable distributions Charity

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