Stock Restrictions Disqualify Marital Deduction

Article excerpt

A common feature of a family-owned, or closely-held corporation is restrictions on the transferability of stock. These restrictions may be in the form of a right of first refusal, an option held by other shareholders to buy at a reduced price, or a prohibition on sale to outsiders. Although these restrictions are created to protect the family, they may cause devastating consequences to the estate plan, specifically the marital deduction.


The decedent in TAM 914705 owned 95% of the shares of stock in a closely held corporation and his family owned the remaining 5%. The decedent's will created a trust for the decedent's wife which was intended to qualify for the marital deduction. Under the terms of the will, the decedent's two sons were given an option to purchase the company stock from the executor of the estate at a price of $1,000 per share within 24 months after the decedent's death, which was $10,000 per share less than the fair market value. The sons purchased 30 shares leaving about 530 shares to find the marital trust.

The IRS disallowed the marital deduction with respect to the portion of the wife's trust that was to be funded with company stock. The IRS viewed the son's option as a power of appointment which was exercisable for 24 months after the decedent's death. There was no way to predict the value of the marital trust by the due date of the estate tax return nine months after death. Since the fair market value of the stock as of the decedent's death was 11 times the option price, the sons' right to make a bargain purchase of the stock during the spouse's life could substantially deplete the value of the trust corpus. …


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