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U.S. Trust® Family Office Profile: The Corporate Executive

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Profile of a Successful Corporate Executive

The chairman and CEO of a publicly traded company turned to U.S. Trust, Bank of America Private Wealth Management to review his financial plan, including the diversification of his concentrated position in his company's shares. Working with him and his spouse, U.S. Trust analyzed the couple's plan from a holistic, integrated perspective. As they considered and agreed upon various strategies — related to retirement, estate and charitable planning, and other considerations — The family office at U.S. Trust, Bank of America Private Wealth Management was involved in every step of the implementation and administration process.

"Like so many time-pressed executives, he had chosen to devote his time and energy to his company's financial well-being rather than his personal financial well-being," noted his private client advisor. "He also had much of his wealth tied up in company stock, but he was willing to bear that risk for the sake of the firm." From a diversification standpoint, many executives tend to be conservative when it comes to SEC and public perception issues, and this CEO was no exception.

Retirement Planning

The client planned to retire within four years. As is the case with most successful CEOs, the timing of his retirement, along with the diversification of his concentrated holding, had significant financial implications — not only for himself and his family, but also for his company's employees and shareholders.

The U.S. Trust® team of specialists helped the CEO to feel comfortable with his retirement plans by quantifying future cash inflows and outflows via a multiyear lifestyle cash-flow analysis. "We projected his income from a range of sources: salary, bonus, stock options, restricted stock, nonqualified deferred compensation plans, 401(k)s, IRAs, and portfolio income," his private client advisor said. "And then we estimated the couple's expenses, not only their own inflation adjusted cost of living — which included such items as the cost of private airfare — but also outflows related to their desire to care for family, philanthropic goals and their intention to provide for all education-related costs for their six grandchildren."

As the growth of the public company flourished and retirement approached, the private client advisor engaged a U.S. Trust® family office principal, senior client manager and their team to consult and provide solutions required for the day-to-day management and administration of the family's affairs upon the CEO's retirement. To provide timely and meaningful guidance, the members of the family office team became intimately familiar with all of the CEO's company compensation and benefit plans. U.S. Trust provided guidance on stock option planning, investment elections for all qualified and nonqualified savings plans, beneficiary designations, section 83(b) elections, and the form and timing of distribution elections. "One of the biggest decisions facing the client," observed his private client advisor, "was how to take his significant pension benefit: lump-sum versus a single-life annuity versus a joint and survivor election. We discussed the pros and cons of each choice at length so that he felt comfortable that he could make an informed decision.

Concentration Management and Diversification

As is typical with chief executives, the client's holding in his company's shares was much larger than it appeared at first glance. Not only did he own shares outright, but there was also equity-linked compensation, as well as salary, bonus, supplemental pensions and other forms of exposure. "We were also mindful that as a company insider he faced significant restrictions," recalled the private client advisor. "The SEC, public relations, company-imposed minimum ownership requirements — these were among the many things to consider before he could transact his company's shares."

Tax-deferred accounts. The team's first step was to diversify company shares and company share equivalents held in tax-deferred accounts. This process could be accomplished at no income tax cost. "Working with the company's general counsel, we sold share equivalents held within the company's nonqualified deferred compensation plan and reinvested the proceeds in a taxable fixed income portfolio," said the private client advisor. But when it came to the shares held in the company's 401(k) plan, the team realized the situation was not as clear-cut. "These shares had a relatively low cost basis," a team member explained. That, combined with the client's charitable intentions, meant that the shares were "potential candidates for Net Unrealized Appreciation (NUA) treatment at some point in the future." So the team did not sell them. "We did, however, change the investment election on both the nonqualified and qualified plans to redirect future contributions to diversified funds rather than to company shares."

The trading plan. The next step the team took was to work with the company's general counsel to establish an SEC 10b5-1 Trading Plan. This was used to exercise and sell a set number of nonqualified stock options each quarter as long as the trading price that date was above a predetermined floor. The private client advisor described what the client did with the after-tax proceeds from the exercise and sale of the options over several quarters: "He used it to pay down nondeductible debt, purchase a boat and a vacation home, and help pay for their youngest daughter's wedding." Remaining funds were invested in a series of tax-efficient portfolios that provided exposure to broad-based domestic and international equity indexes. These portfolios were titled in the CEO's spouse's name, in an ongoing effort to equalize the value of the couple's respective estates. The domestic portfolio was also customized to exclude the CEO's own company and the most closely correlated names. "A key benefit of this strategy is its ability to provide efficient tax loss harvesting," a team member said. These losses can be carried forward for federal tax purposes to offset capital gains realized elsewhere in the couple's portfolios in the future. The systematic harvesting of capital losses does not hamper pretax performance but enhances after-tax return.

Philanthropy. "The CEO and his wife were philanthropically minded," said the family office principal, "so the team frontloaded several years' worth of charitable contributions in the form of low-basis company shares into a private family foundation." This had several benefits. First, it locked in the current favorable trading price of the shares while the deduction mitigated the income tax hit from the exercise and sale of the options. More important to the couple, though, was the annual foundation meeting hosted by U.S. Trust. "It continues to give them an opportunity to share their views on philanthropy with their children," the private client advisor noted, "and to educate them specifically about the investment of the foundation's assets."

U.S. Trust administers the foundation, which includes serving as the address of record, handling all grants that the family directs, and coordinating tax preparation. "We also worked with the family to develop a mission statement for the foundation," said the family office principal.

Providing for family. The couple wanted to strike a balance between helping their children financially and allowing them to make their own way — giving them a sense of accomplishment and true independence. Said the private client advisor: "The team devised a solution that integrated the parents' charitable intentions and their exposure to a concentrated position." They established a Charitable Remainder Uni-Trust, or CRUT, for each of the couple's four children, and funded them with company shares. "The CRUTs will provide a predetermined range of annual income to each child, to assist them in meeting their financial obligations by complementing their own earnings," said a team member. "We manage all aspects of the CRUTs, including investment management and the annual payouts." At each child's passing, the balance of the CRUT will pass to the family foundation.

Estate Planning, Wealth Transfer, Education Funding

The CEO and his spouse had set up an estate plan years earlier, before their wealth had really escalated. Given the substantial increase in their estate's value since that time, the U.S. Trust team recommended a reevaluation of the estate plan.

Review of estate plans. Working with the client's legal advisors, the team updated all testamentary documents, medical directives and powers of attorney. Understandably, some individuals named several years ago to administer a less complex estate needed to be changed. "We discussed the challenges and liability that arise from having family members or friends acting as sole executor and trustee once an estate becomes far more complex." As layers of sophistication are added, there are benefits to naming a more experienced corporate fiduciary to serve as a cofiduciary with the named individuals to oversee the administration of wealth through multiple generations. The couple felt comfortable involving a corporate fiduciary and chose U.S. Trust.

Marital trusts. A key objective for the client was to ensure that each surviving family member would be provided for in the event of his death. The estate plan was structured to provide maximum flexibility for income and principal distributions to meet family members' living needs but also to provide asset protection against creditors — which could include a child's future ex-spouse. "We used marital trusts that provided maximum flexibility for the spouse but required all funds at the surviving spouse's death to pass to their descendants," explained the family office principal. "We also used a series of trusts for their children that allowed each child to become a cotrustee of his or her respective trust at a certain age." This allowed each child to have control over his or her inheritance while still providing a reasonable level of asset protection.

Exclusion gifts.The family office team assisted the clients in making annual exclusion gifts to each family member. They were also able to make unlimited payments for tuition and medical bills incurred by others, by sending payments directly to the providing institution (elementary school, hospital, etc.).

Family LLC. The team created a Family Limited Liability Company, or LLC, to serve as a pooled vehicle for the family's investments. "We used some of the CEO's vested nonqualified stock options, among other assets, for initial funding purposes," said the couple's dedicated family office principal. "Limited member interests were gifted directly to an Intentionally Defective Grantor Trust, transferred to a Grantor Retained Annuity Trust (GRAT), and sold to a Generation-Skipping Transfer Tax-Exempt Dynasty Trust, all for the ultimate benefit of the couple's heirs." These strategies minimized transfer taxes so that no out-of-pocket tax liabilities were owed. They also allowed the client and his spouse to efficiently use their lifetime gift-tax exemption amounts. U.S. Trust's Partnership and LLC Accounting team handled all of the accounting requirements for this entity.

Asset Protection Planning

We strive to include prudent asset protection strategies in all aspects of our clients' financial and estate plans," said the private client advisor. "When the CEO revealed that he served as a director on the board of another public company, the team coordinated a review of that firm's directors and officers (D&O) policy. The purpose was to fully understand the terms of the client's directorship — and to evaluate his potential financial exposure should the company encounter serious problems, such as shareholder lawsuits.

But that was just an initial step in protecting the CEO's wealth, said the private client advisor. "We also worked with the client to retitle roughly half of his assets into his spouse's name — not only for general asset protection purposes but also to ensure use of all gift- and estate-tax exemption amounts." The team also created and funded a Delaware Asset Protection Trust with a portion of the client's assets. "Delaware is one of only a few states to allow what is essentially a self-settled spendthrift trust whose assets are protected against most claims of the grantor's creditors, even though the grantor retains an interest in the trust," explained a team member. Lastly, the team retitled a working ranch the couple owned into the name of an LLC.

Investment Consulting

The CEO was quite a sophisticated investor, but like many executives, he had devoted himself to the needs of his company and had spent little time focusing on his own personal assets," said the private client advisor.

As a result, the team developed and gradually implemented a unique strategic asset location target for each of his financial entities (personal assets, foundation, CRUTs, trusts, LLC). They also evaluated the funds available through the client's various company-sponsored plans. They used the funds that made sense from a performance and asset allocation standpoint. For example, they met a target asset allocation to fixed income largely through the use of a highly regarded taxable fixed income fund available within a tax-deferred account. Instrumental to supporting the allocation process was the use of the U.S. Trust family office Personal Information Management Service (PIMS) platform for aggregating holdings across institutions in one place and providing consolidated view of the family's full balance sheet.

The team also used customized index portfolios within the CEO's taxable accounts to help meet domestic and international equity target allocations. "These portfolios provided broad-based, tax-efficient and cost-effective market exposure. They also harvested capital losses, which can be carried forward indefinitely in anticipation of a liquidation event at retirement," a team member noted. Continuing with an open-architecture investment approach, they tapped into various resources for manager selection for alternative asset classes such as hedge funds, real estate, private equity and hard assets.

Working with the Younger Generation

Our clients typically look to us to care for their surviving spouses and children in the event of their passing," an advisor explained. "As a result, we develop relationships with family members as soon as possible to begin the education process. That said, we share information regarding the parents' situation and plans only at the parents' discretion. More often than not, though, clients look to us to explain the details of their parents' estate plans."

For the CEO and his family, U.S. Trust professionals met separately with each family unit (child and his or her respective spouse) on a regular basis. The goal was to apply the same holistic, integrated approach to each family unit since each comes to U.S. Trust with a unique set of circumstances, goals and objectives.

Customized Administrative Services

In addition to serving as the administrator on all the client's family entities, U.S. Trust customized various services to help meet the family's specific needs. This included preparing customized cash-flow reports on a quarterly basis. There were also clear and concise monthly valuation and performance measurement statements for the individual entities and the combined family relationship. "We also coordinated the tax return preparation for all of the various entities, including the couple's personal returns, with their outside tax accountant," explained the private client advisor. Finally, the firm handled many of the family's banking needs, including wire transfers, mortgages, and checking and savings accounts.

U.S. Trust's Mission

Developing a successful wealth plan for an executive demands an in-depth understanding of his or her life situation. By bringing together our team of multidisciplined specialists to meet individually with executives to identify their goals and objectives, we in turn provide a truly holistic and customized experience. In addition to developing well-crafted planning considerations, we work with our clients and their existing advisors to implement each plan and to help ensure that goals and plans are completely integrated. Our approach is based on customization, executed with precision, and distinguished by flexibility and expertise. We are proud of our longtime role in helping families manage their wealth and plan for the future.

U.S. Trust Serves as the Family Office

Today, the CEO is retired but still serves as a consultant for the public company. He spends most of his time on philanthropic pursuits, including the management of his family's private charitable foundation. As a result of the substantial wealth created, the CEO and his family's personal and estate finances have become even more complex. Currently, three generations of the family hold interests in various partnerships, LLCs and trusts. U.S.

Trust now serves as the family office.

The U.S. Trust family office provides comprehensive financial planning services to the family as a whole, as well as to each family unit. Guidance is provided in the areas of estate planning, retirement planning, education funding, investment planning, income tax planning, insurance planning, asset protection planning and philanthropic planning. The team draws upon the vast resources of Bank of America as needed, but a single point of contact for the client and a low client-to-staff ratio contribute to a personalized focus on their unique needs.

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