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A client had an exploration and production company in Houston, Texas that he had successfully managed for over 20 years. He had three children and was concerned about providing for their future financial security.

Working closely with his legal and tax advisors, we discussed a number of techniques to help him tax efficiently transfer company shares to his children. Given the improving energy industry outlook, we looked at transferring shares into a trust, specifically a grantor retained annuity trust (GRAT). A GRAT is designed for assets that are expected to appreciate significantly during the trust term—typically two to five years. (This strategy might not be appropriate if the recovery outlook for the value of the business is longer-term.)

In this case, transferring assets to a GRAT at their current, lower valuation would allow future appreciation to occur outside of his estate. This strategy could result in the transfer of more wealth to his children, versus continuing to hold company shares until his death. Following his discussions and analysis, the business owner decided to move a significant portion of his exploration and development business holdings into the GRAT.

Avoiding a future fire sale

His advisors continued to have estate planning discussions with him, helping him understand the impact of U.S. estate taxes, which generally must be paid within nine months of death. In his situation, his family potentially faced estate taxes upon his death equal to approximately half the value of the business. Without a strategy in place to meet this tax bill, his family could be forced to sell the business.

Working with his legal and tax advisors, his J.P. Morgan Private Bank advisors educated him about an opportunity to finance estate taxes through a credit strategy that would be implemented after his death. This tax-efficient technique would allow the family to pay the tax bill with an upfront deduction of all interest to be paid over the life of the loan. This strategy, which may not be appropriate for all situations, positioned the family to avoid a forced sale of the business.

The business owner was able to focus on continuing to expand his business, knowing that important safeguards were in place to help protect it.

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For a J.P. Morgan Private Bank energy-focused banker near you, please contact pb.energy@jpmorgan.com.

IMPORTANT INFORMATION

All case studies are shown for illustrative purposes only and should not be relied upon as advice or interpreted as a recommendation. All case studies are shown for illustrative purposes only, and are hypothetical. Any name referenced is fictional. Information is not a guarantee of future results. This material is intended to help you understand the financial consequences of the concepts and strategies discussed here in very general terms. The strategies discussed often involve complex tax and legal issues. Your own attorney and other tax advisors can help you consider whether the ideas illustrated here are appropriate for your individual circumstances. JPMorgan Chase & Co. does not practice law, and does not give tax, accounting or legal advice. We are available to consult with you and your legal and tax advisors as you move forward with your planning.

Lines of credit are extended at the discretion of J.P. Morgan, and J.P. Morgan has no commitment to extend a line of credit or make loans available under the line of credit.  Any extension of credit is subject to credit approval by the lender in accordance with the terms contained in definitive loan documents. 

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