An innovative method to solve estate planning, succession of ownership and philanthropic planning needs

1. 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

2. 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.

3. Objectives
• Structure a Partially
Deductible Stock redemption
Plan
• Reduce Estate Tax Exposure
Provide Discretionary Income
for Retirement
Vincent J Gallo &
Associates,Inc.

4. 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.

5. 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.

6. 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.

7. Assumptions (cont’d)
• Objectives
• Succession Plan
• Income for Owner
• Optimize Cash Flow
• Enhance Estate Plan
– Reduce Transfer Costs
Vincent J Gallo &
Associates,Inc.

8. The ABC Owner
Company, Inc.
Owner Donates $ 2
Million of The ABC
Co., Inc. Stock to a Charitable
Charitable Remainder
Remainder Trust Trust
Vincent J Gallo &
Associates,Inc.

9. 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.

10. 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.

11. The ABC
Company, Inc.
Owner Others
CRT
$0.25M
$3.0 M
$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.

12. 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.

13. 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.

14. 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.

15. CRT
7.5%
Demand
Note
Trustees of QSO
QSO Issues Demand Note
for Stock Redeemed
Vincent J Gallo &
Associates,Inc.

16. 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.

17. Demand Note
A 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.

18. Annual Cash Flow
Income Payment
CRT
Interest
Payment
Deductible
Contribution
QSO
Vincent J Gallo & The ABC Co.,
Associates,Inc.
Inc

19. 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.

20. The ABC, Inc.
Interest Payments of
For Life
to M/M Owner
Interest
Payments
CRT
fbo
M/M Owner
QSO
Based on IRC Sec 72 Joint Life Expectancy Table
M/M Owner will receive Payments for 29 years
Vincent J Gallo &
Associates,Inc.

21. 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.

22. 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.

23. 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.

24. 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.

25. 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.

26. 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.

27. 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
Vincent J Gallo &
Associates,Inc.