Thursday April 25, 2024

4.12.3 Gifts of Family Stock

Gifts of Family Stock

Gifts to Children and to Charity:  Many parents desire to transfer stock to children.

Gift and Redemption:  With a charitable gift outright to a charity or in exchange for a gift annuity, there are no self-dealing considerations.

Unitrust and Redemption:  A family may be interested in using a charitable remainder unitrust to sell a family business and provide income.

Gifts to Children and to Charity

Many parents desire to transfer stock to children. An excellent plan is to combine annual gifts of stock to children with annual gifts of stock to charity. Both gifts require an independent appraisal to determine the stock value.

In valuing gifts to children, the incentive is to set a low value. However, the reverse is true in the case of gifts to charity. By obtaining an independent appraisal and using the appraised value for both the gifts of stock to children and the gifts to charity or charitable trusts, there is good balance to the plan.

Gift and Redemption

With a charitable gift outright to a charity or in exchange for a gift annuity, there are no self-dealing considerations. However, at the time of the gift there cannot be any binding agreement between the donor and the charity regarding a subsequent repurchase or sale of the stock. Any future repurchase or sale of the stock by the charity must be at fair market value. Rev. Rul 78-197, 1978-1 CB 83.

Unitrust and Redemption

A family may be interested in using a charitable remainder unitrust to sell a family business and provide income. To do this, the family will transfer its stock to a charitable remainder unitrust. The family will receive a charitable income tax deduction for this transfer and the unitrust will then sell the stock tax-free.

Any sale of the stock by the unitrust is limited by the self-dealing rules. Sec. 4941; Sec. 4947(a)(2). The self-dealing rules prohibit the unitrust from engaging in any transaction, including a sale, with a disqualified person. A donor is a disqualified person as are his or her lineal ancestors or descendants and their spouses. Sec. 4946(d). Any corporations in which a donor or his or her family members own more than 20% of the total voting power are also disqualified persons.

While a unitrust ordinarily cannot directly sell stock to a disqualified person, a corporation's redemption or repurchase of stock from a unitrust is permitted so long as the following specific rules are followed. Sec. 4941(d)(2)(F). First, a repurchase must be at fair market value. Second, the company must offer to repurchase all of its stock "subject to the same terms" so that every shareholder has opportunity to sell shares back to the corporation under the same price and terms. As a practical matter, since family members hold all the stock and understand the goal of the charitable bailout, these provisions do not create a major obstacle.

Some period of time should separate a donor's contribution of stock to a unitrust and the corporation's subsequent repurchase of this stock. The length of this separation period will vary by situation. In some cases, more than a year separates the gift and repurchase, in others, a period of two to eight weeks is sufficient. Donors may wish to consult with counsel with respect to the appropriate time separation in any particular case.

When the repurchase occurs, the company must pay the unitrust cash for its shares. A note may not be used since a unitrust is generally not permitted to lend to the corporation under the self-dealing rules. If a company needs additional funds to make the repurchase, it should borrow independently and use the cash from the loans secured by other corporate assets to repurchase the stock. Sec. 4941(d)(1)(B).

Case Studies on Gifts of Family Stock

A $3 Million "Hand-me Down": Printing Shop, Inc., has been a staple in the printing business for over 80 years now. Jacob Kestrel founded the company in 1922 when he opened his first store on the corner of a busy little New York City street. As a hands-on owner, Jacob cherished his relationships with his customers.