Leveraged Reverse Freezes
Traditionally, a reverse freeze has been strategy that has been used to manage and transfer wealth between a limited partnership (“LP”) or a limited liability company (“LLC”) that is composed of both preferred and common interests. A reverse freeze is established in a way that makes the partnership interest the preferred interest. Preference returns are paid to the preferred partnership (“PP”) and are senior to all common partnership (“CP”) distributions.
A leveraged reverse freeze is a configuration of a traditional reverse freeze. In a leveraged reverse freeze, a preferred partnership interest is exchanged for either a note, transfer of preferred partnership interest to a designated grantor retained annuity trust (GRAT), or other types of real estate planning means. Interest payments on such vehicles are typically paid at the applicable federal rate (“AFR”) or the Internal Revenue Code Section 7520 rate.
Under most circumstances, the seller of the preferred partnership interest maintains the common partnership interest. The end goal of a leveraged reverse freeze is for the receiving family member or GRAT to receive a portion of the cash flow and appreciation after all interest payments/GRAT annuity payments have been accounted for. In order for a leveraged reverse freeze to be successful, it is critical for the preference rate, which is part of the preferred partnership, required to preserve the face value to be much greater than the applicable federal rate or the Section 7520 rate.
Federal Appraisal LLC offers several important services for those creating leveraged reverse freezes including, but not limited to:
- Acting as a consultant to the estate planner regarding the structure of the partnership
- Determining the appropriate preference rate to the preferred partnership interest
- Determining the percentage of preferred partnership interests
- Calculating the Fair Market Value (“FMV”) of the common partnership interests
Interested candidates of a reverse freeze, leveraged reverse freeze, or a vast array of other appraisal services can visit federalappraisal.com or email mark@federalappraisal.com
