Contract analysis

I. Executive Summary The purpose of this memorandum is to analyze and recommend an optimal allocation strategy for Jonathan R. Caldwell's generation-skipping transfer tax ("GST") exemption across the various trust structures established as part of the comprehensive generational estate plan designed and implemented by Calderwood & Harkness LLP during the period of February through September 2023 (the "Caldwell Generat

1. Caldwell Family Dynasty Trust — A Delaware-situs irrevocable trust established April 1, 2023, with an initial cash funding of $5,000,000, plus anticipated receipt of GRAT remainder interests upon expiration of three grantor retained annuity trusts;

2. Three Grantor Retained Annuity Trusts ("GRATs") — (a) Caldwell 2023 Securities GRAT ("GRAT A"), (b) Caldwell 2023 Realty GRAT ("GRAT B"), and (c) Caldwell 2023 Carried Interest GRAT ("GRAT C"), each structured as a zeroed-out GRAT under IRC § 2702 with remainder interests payable to the Caldwell Family Dynasty Trust;

3. Caldwell Revocable Trust Provisions — Specifically, the credit shelter trust and marital QTIP trust established under the Amended and Restated Caldwell Revocable Trust (effective April 1, 2023), which will be funded at Jonathan's death; and

4. Caldwell Family Insurance Trust ("ILIT") — An irrevocable life insurance trust established March 15, 2023, holding a $15,000,000 second-to-die universal life policy on the lives of Jonathan and Eleanor V. Caldwell. Summary of Recommendations. Based on the analysis set forth in this memorandum, we recommend the following GST exemption allocation strategy: • Allocate $5,000,000 of GST exemption to the Caldwell Famil

II. Overview of the Generation-Skipping Transfer Tax

II.A. Statutory Framework The generation-skipping transfer tax ("GST tax") is imposed under Chapter 13 of the Internal Revenue Code, IRC §§ 2601 through 2664. The GST tax is designed to prevent wealthy individuals from avoiding the transfer tax system by transferring assets directly to grandchildren or more remote descendants, thereby "skipping" a generation of estate or gift tax. The GST tax operates as a backstop t

II.B. GST Exemption Each individual is allowed a lifetime GST exemption under IRC § 2631. The GST exemption amount is equal to the basic exclusion amount under IRC § 2010(c), which for 2023 is $12,920,000 (as adjusted for inflation under IRC § 2631(c)). The GST exemption is the primary mechanism by which transferors can shelter transfers to grandchildren and more remote descendants from the GST tax. The GST exemption

II.C. Relationship Between Gift Tax Exemption and GST Exemption It is important to distinguish between the gift tax exemption and the GST exemption. Although both are currently set at the same dollar amount ($12,920,000 for 2023), they are consumed independently and serve different purposes. The gift tax exemption (technically, the "applicable exclusion amount" under IRC § 2505 and § 2010(c)) shelters lifetime gifts

III. GST Exemption Allocation to the Caldwell Family Dynasty Trust

III.A. Initial Funding — $5,000,000 Cash Gift (April 1, 2023) On April 1, 2023, Jonathan R. Caldwell established the Caldwell Family Dynasty Trust (the "Dynasty Trust") as an irrevocable trust with situs in Delaware. The Dynasty Trust was created pursuant to the Caldwell Family Dynasty Trust Agreement dated April 1, 2023, and is governed by the laws of the State of Delaware. The selection of Delaware situs was made d

III.B. Recommended Allocation We recommend that Jonathan R. Caldwell affirmatively allocate $5,000,000 of his GST exemption to the initial $5,000,000 cash funding of the Dynasty Trust on his 2023 Form 709. This allocation will be reported on Schedule D (Computation of Generation-Skipping Transfer Tax) of the return and will be coordinated with Strathmore Corporation & Greaves LLP. The allocation produces the followin

III.C. Timing of Allocation and Form 709 Reporting The allocation of GST exemption to the Dynasty Trust initial funding will be reported on Schedule D (Computation of Generation-Skipping Transfer Tax) of Jonathan R. Caldwell's 2023 Form 709. Under IRC § 2632(a), an allocation of GST exemption to a direct skip, and under IRC § 2632(b), a lifetime allocation of GST exemption to any trust, is made on a timely filed gift

IV. ETIP Rules and GRAT Remainder Interests

IV.A. The Estate Tax Inclusion Period (ETIP) — § 2642(f) The Estate Tax Inclusion Period ("ETIP") is one of the most critical concepts in GST exemption allocation planning and has direct bearing on the treatment of the three GRATs established as part of the Caldwell Generational Estate Plan. Under IRC § 2642(f)(1), any allocation of GST exemption to property transferred in a transfer subject to an estate tax inclusio

IV.B. Application to Each GRAT The Caldwell Generational Estate Plan includes three zeroed-out GRATs, each funded with different asset classes and having different annuity terms. The ETIP analysis for each GRAT is as follows: GRAT A — Caldwell 2023 Securities GRAT • Funding Date: April 15, 2023 • Assets Contributed: Publicly traded securities with a fair market value of $60,000,000 • Annuity Term: 2 years • Annual An

IV.C. Consequences of the ETIP Rule The ETIP rule has several important consequences for the Caldwell Generational Estate Plan: First, because each GRAT is structured as a zeroed-out GRAT under IRC § 2702 — meaning that the present value of the retained annuity interest equals the value of the property transferred, resulting in a taxable gift of approximately zero — there is no reportable taxable gift to which GST ex

IV.D. Projected GST Exemption Needs Post-ETIP The estate plan projects that the GRATs will outperform the 5.0% § 7520 hurdle rate (applicable for April, May, and June 2023 GRAT fundings) by approximately 4% per annum on average, generating an estimated $35,000,000 to $50,000,000 in aggregate excess appreciation that will transfer to the Dynasty Trust upon expiration of the three GRAT annuity terms. The specific proje

IV.E. Strategies to Address GST Exemption Shortfall Given the projected mismatch between available GST exemption ($7,920,000) and projected GRAT remainder values ($35,000,000 to $50,000,000), several strategies should be considered: Separate Share Rule / Qualified Severance. Under IRC § 2642(a)(3) and Treasury Regulation § 26.2642-6, a trust may be severed into two or more trusts in a "qualified severance" that resul

V. GST Treatment of the Caldwell Family Insurance Trust (ILIT)

V.A. Current Structure The Caldwell Family Insurance Trust (the "ILIT") was established on March 15, 2023, as an irrevocable trust with Jonathan R. Caldwell as grantor and Northgate Trust Company of Delaware as trustee. The ILIT was created as part of the Caldwell Generational Estate Plan to hold life insurance for the purpose of providing liquidity at the deaths of Jonathan and Eleanor to cover anticipated estate ta

V.B. GST Analysis The GST analysis of the ILIT requires consideration of both the nature of the current beneficiaries and the identity of the remainder or contingent beneficiaries under the ILIT trust agreement. Crummey Withdrawal Powers. Each of the three Crummey beneficiaries — Thomas, Katherine, and Olivia — is a non-skip person (Generation 2). The annual exclusion gifts subject to the Crummey withdrawal powers ar

VI. Reverse QTIP Election and the Marital Trust

VI.A. Structure of the Credit Shelter Trust and Marital QTIP Trust Under the Amended and Restated Caldwell Revocable Trust, effective April 1, 2023 (originally dated October 3, 2010, and previously amended November 15, 2016), the following dispositive provisions take effect upon Jonathan's death: (a) Credit Shelter Trust. A credit shelter trust (also referred to as a "bypass trust" or "family trust") is funded with a

VI.B. GST Exemption Allocation to Credit Shelter Trust At Jonathan's death, the credit shelter trust will be funded with the then-available estate tax exemption amount. If the current exemption amount of $12,920,000 remains in effect, the credit shelter trust will receive up to $12,920,000 (reduced by any post-mortem adjustments). If the 2025 sunset occurs and the exemption reverts to approximately $7,000,000, the cr

VI.C. Reverse QTIP Election — § 2652(a)(3) The reverse QTIP election is a specialized GST planning tool authorized by IRC § 2652(a)(3). Under general principles, the "transferor" for GST purposes is the individual with respect to whom the property was most recently subject to estate or gift tax. For QTIP property, this creates a complexity: at Jonathan's death, the QTIP election treats the marital trust property as a

VI.D. Eleanor's Independent GST Exemption Eleanor V. Caldwell holds her own GST exemption of $12,920,000 for 2023. Eleanor is not the grantor of the Dynasty Trust, the three GRATs, or the ILIT. She is a co-grantor (with Jonathan) only of The Caldwell Family Foundation, which is a charitable entity organized under IRC § 501(c)(3) and does not generate GST implications, as transfers to charitable entities are not subje

VII. Automatic Allocation Rules and Elections

VII.A. Automatic Allocation to Direct Skips — § 2632(a) Under IRC § 2632(a), GST exemption is automatically allocated to any direct skip — that is, a transfer subject to gift or estate tax made directly to a skip person — to the extent of the transferor's available GST exemption, unless the transferor elects out on a timely filed Form 709. No direct skips are contemplated in the current Caldwell Generational Estate P

VII.B. Automatic Allocation to Indirect Skips — § 2632(c) Under IRC § 2632(c), enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"), transfers to "GST trusts" are treated as indirect skips and automatically receive an allocation of the transferor's GST exemption. The purpose of this rule is to prevent inadvertent loss of the GST exemption in situations where a transferor makes a

VII.C. Election Out of Automatic Allocation For any trust to which automatic allocation is undesirable, the transferor may elect out of the automatic allocation by filing an appropriate statement on a timely filed Form 709 for the calendar year of the transfer. The election out is authorized by IRC § 2632(c)(5)(A)(i) and is described in Treasury Regulation § 26.2632-1(b)(2). The election-out statement must identify t

VIII. Coordination with Gift Tax Return (Form 709) for 2023

VIII.A. Transfers to Be Reported The following transfers made by Jonathan R. Caldwell during 2023 must be reported on his 2023 Form 709:

1. GRAT A Funding (April 15, 2023). Jonathan transferred publicly traded securities with a fair market value of $60,000,000 to the Caldwell 2023 Securities GRAT. The GRAT is structured as a zeroed-out GRAT under IRC § 2702, with the present value of the retained annuity interest equaling the value of the transferred property. The taxable gift is $0. The transfer must be reported on the Form 709 for adequate disclosur

2. GRAT B Funding (May 1, 2023). Jonathan transferred membership interests in Stonecrest Holdings LLC to the Caldwell 2023 Realty GRAT. The pre-discount fair market value of the underlying real estate is $80,000,000; the post-discount value of the membership interests (reflecting applicable valuation discounts for lack of control and lack of marketability, as supported by an independent appraisal) is $60,000,000. The

3. GRAT C Funding (June 1, 2023). Jonathan transferred limited partnership interests and carried interests in Caldwell Ridgeline Capital LP to the Caldwell 2023 Carried Interest GRAT. The pre-discount fair market value is $38,000,000; the post-discount value is $25,300,000. The GRAT is zeroed-out, with a taxable gift of $0. The transfer must be reported; no gift tax is due; no GST exemption allocation is made (ETIP i

4. Dynasty Trust Initial Funding (April 1, 2023). Jonathan transferred $5,000,000 in cash to the Caldwell Family Dynasty Trust. The transfer is a completed taxable gift. Jonathan applies $5,000,000 of his lifetime gift tax exemption (applicable exclusion amount) to the transfer; no gift tax is due. GST exemption of $5,000,000 is affirmatively allocated to the transfer on Schedule D, as discussed in Section III above.

5. Foundation Contribution (2023). Jonathan and Eleanor V. Caldwell made a joint contribution of $10,000,000 in cash to The Caldwell Family Foundation, split $5,000,000 each between Jonathan and Eleanor as co-grantors. The contribution qualifies for the charitable gift tax deduction under IRC § 2522 and the income tax charitable deduction under IRC § 170. The transfer is reported as a charitable gift on Jonathan's Fo

6. ILIT Premium (2023). Jonathan contributed $187,500 to the Caldwell Family Insurance Trust for the annual premium payment. Of this amount, $51,000 is covered by the gift tax annual exclusion (3 Crummey beneficiaries × $17,000 per beneficiary). The remaining $136,500 uses Jonathan's lifetime gift tax exemption. No GST exemption allocation is made; an election out of automatic GST allocation to the ILIT is recommende

VIII.B. Schedule D — GST Exemption Allocation Summary (2023 Form 709) The following GST exemption actions should be reflected on Schedule D (Computation of Generation-Skipping Transfer Tax) of Jonathan R. Caldwell's 2023 Form 709: The above schedule is subject to adjustment pending confirmation from Strathmore Corporation & Greaves LLP of prior GST exemption allocations. If any prior GST exemption was allocated to ea

VIII.C. Coordination with Strathmore Corporation & Greaves LLP The draft Form 709 and Schedule D are being prepared by Calderwood & Harkness LLP (Sylvia Hartwell and Elliot Nguyen). Upon completion, the draft will be transmitted to Martin J. Prescott, CPA, at Strathmore Corporation & Greaves LLP, for the following actions:

1. Review and reconciliation with Jonathan's prior-year gift tax returns and cumulative gift tax and GST exemption usage;

2. Confirmation of prior GST exemption allocations (if any) and the available GST exemption balance entering 2023;

3. Finalization of the 2023 Form 709, including all schedules and attachments;

4. Filing of the return with the Internal Revenue Service on Jonathan's behalf. The filing deadline for the 2023 Form 709 is April 15, 2024. An automatic six-month extension to October