RE: Re:

i have reviewed the 2703 regs, i don't see the issue, if the trust buys an option, at market, today and the stock goes up, the stock gets valued at the fair market, but the cash settled option comes due reducing the value of the estate, bringing the same net result. and even better if debra gets the stock with a step up, what am i missing?

I agree (although at least one of my partners does not) that you can avoid the reach of section 2703 with a cash settled option.

How would we price the option? Are call options on the stock publicly traded? How are dividends treated under the normal stock option?

Here's how I understand your proposal.

Step 1- LB buys stock from Trust (T) for $1B. LB issues a $18 note to T bearing interest at X and secured by a lien on his art. We need to discuss what X should be. We also need to think about the mechanics which are made a little difficult by the fact that the stock is held in a partnership. We also need to think about the fact that much of his art is already subject to a lien held by US Trust.

Step #2 - LB sells a 2 year call to T. The price for the call is $.1B (obviously, a rough estimate); the strike price is the current market price.

Step 5 - LB sells another 2 year call to T, etc.

There are no income tax consequences because of the grantor trust rules.

What are the securities law consequences? Are any of these transactions covered by Rule 16b? Do these transactions have to be reported?

Is this what you had in mind?

good first try, yes call options are publicly traded, we would do five to ten year terms, he could purchase the partnership interest I guess, valuation the issue, he could decide on how much, we wouldn't need to bypass 2703, the stock would be full value but there would be a liability against it, which could not be ignored. he would not need much money to live as he would have the full dividends.

1. according to the strike, price, 2. the economic effect can be managed in the document. 3, security wise lock up is only concern as long as it happens near the same time and is not deep in the money, 4, the price of the option reflects the risk of that.

What would the price of a 10 year option be?

Although he can buy the PS interest, the call will have to be on the stock itself.

Your structure bypasses 2703 because LB will never deliver the stock pursuant to the option. The economic effect, however, is the same. That's why some think it doesn't work.

What are the securities law consequences of LB buying stock and then selling a call?

Does the purchaser of a publicly traded call risk the possibility that the stock value will not increase because all the growth will be paid out in dividends?

we can actually get prices. we could make them european, only exercisable at expiration. etc. yes

I know that the relationship between the strike price and current value are important factors in determining the price of an option but aren't the length of the option and the volatility of the stock also very important? If there are no 10 year publicly traded options we would have to get an appraisal.

Are you sure that a purchase by LB of the partnership interest followed by a sale by him of a call isn't caught by 16b?

Where can you get prices? I didn't think there were any traded 10-year call options. What kind of price do you think there would be for a 10-year call on with a strike price equal to a stock's current market price?

Carlyn S. McCaffrey | Partner

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