Discussion Archives:Best structure for private equity investment?

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Discussion Forum Index --> Advanced Tax Questions --> Best structure for private equity investment?


Discussion Forum Index --> Tax Questions --> Best structure for private equity investment?

Wrwcpa (talk|edits) said:

18 November 2010
Situation: client wants to invest $4mm in a private equity deal. Client is 70 years old, has liquidity in personal account, IRAs, and controls trusts for children and grand children. He would like to get assets out of the estate. Private equity investment period is 5-7 years with solid upside potential.

Question: how should he make the investment? Any possible advantage to do it in the IRA (doubt it)? Can he do it through the children's trusts even though the children are not AIQP? Perhaps a GRAT or other similar structure?

LH2004 (talk|edits) said:

November 19, 2010
What's the nature of the investment? Stock? A partnership interest? Will it generate active business income? Deductible losses?

These trusts probably are qualified purchasers; that has no relevance unless the investment is in an exempt investment company. Unless they are large, they probably aren't accredited investors, which does matter, but if this $4 million is not a large fraction of the client's net worth, things can probably be arranged to work around that (like setting up a partnership between several entities).

Wrwcpa (talk|edits) said:

19 November 2010
Thanks for your ideas, LH.

The investment will be structured like most private equity deals. An LLC as the holding company that acquires the investment. My client would be a member of the LLC.

Is there any possible reason to do this in an IRA given that he wants to get assets out of the estate?

Doug M (talk|edits) said:

19 November 2010
If this is purchased by the IRA, many things to look out for. Here are some that come to mind.

Finding a custodian. Things that are not easy to value scare most custodians. Liquidity to still to still make the RMD. Finally, this does not get it "out of his estate". Still an asset of his for estate purposes. Are the beneficiary's of the IRA ready to handle this kind of investment?

LH2004 (talk|edits) said:

November 19, 2010
What is underneath the LLC? "Private equity" doesn't mean much. Is this an LBO of a public company? If the LLC is just a holding company for a corporation, it doesn't matter much where it goes.

If he really believes this is a great investment, it would be best to put it in a Roth IRA, as far as income taxes go, and to give it to the kids or grandkids, as far as estate tax; if it's happening this year, taking advantage of the nonexistent GST tax would be smart.

Wrwcpa (talk|edits) said:

19 November 2010
The company being acquired is a private company - a C corp, I believe. So, yes, the LLC is just a holding company for a corporation.

I agree - he should make the gift this year to the children to take advantage of the 35% gift tax rate. I think it's back to the original question of whether he can make the investment directly in the children's trusts even though the children are not qualified investors. From what you say above, it sounds like he can.

Thanks!

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