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Chapter 14: The Good, The Bad, and The Unknown

While Congress replaced the infamous Section 2036(c) with Chapter 14 over a year ago, no one really knows yet what it all means. Never fear. The IRS is working on it.

In November the IRS concluded its second public hearing on the two sets of proposed regulations which implement the 1990 replacement for the anti-estate freeze law. Witnesses expressed diverse views on these regulations, but shared one overriding conclusion: the law is incredibly complex and numerous uncertainties remain in its application. We expect the IRS to act quickly in considering the public comment and then issue final regulations -- possibly as early as next spring. Whether there will be significant modifications to further clarify the law is problematic.

In the meantime, family business owners should know what transactions will or will not be affected by this law. The good news is that many common family business transactions are not affected. Examples include:


  • lending and most leasing arrangements between the business and family members;
  • compensation (other than stock options) of family members;
  • gifts or sales of stock where there is only one class of stock or when there are two classes of common stock which differ only with respect to voting rights;
  • gifts or sales of partnership interests where there is only one class of partnership interest or when there are two or more classes of interests which differ only with respect to management rights and legal liability risks;
  • gifts in trust when the donor and spouse retain no rights to the income or assets of the trust; and
  • buy/sell agreements and stock options involving non-family members.

The following transactions generally are subject to the new law and you should consult competent professional advisors prior to undertaking them:


  • gifts or sales of stock or partnership interests to family members when there is more than one class of equity (other than the limited situations excluded above);
  • gifts in trust where the donor or spouse retains income from or powers over the trust; and
  • buy/sell agreements and stock option arrangements involving family members.

Equity structures, trusts, buy/sell agreements and stock options that existed prior to October 9, 1990 are grandfathered. Avoid any modifications to grandfathered buy/sell agreements and stock options. Changes may cause you to lose grandfathering benefits. If multiple classes of equity existed prior to October 9, any changes to or transfers of equity interests may be subject to the new law.

Although the new rules are more narrow in their application than the anti-estate freeze law which they replaced, they do eliminate or reduce the benefit of estate planning techniques which existed prior to 1988. There is no question that the new law seriously affects the ability to reduce the estate tax burden involved in the succession of family-owned businesses. Although it is still possible to deal with the estate tax burden, now more than ever, early planning is the most beneficial way to minimize estate taxes.

Watch for future articles in the ADVISOR that will address specific issues and planning points which result from this new law and IRS interpretations.

Ross W. Nager




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