Reducing Estate Tax Liability in Corporate Recapitalization: Stock Freezes, Sec. 2701 Rules, Coupling With Gifts

A stock freeze in a corporate recapitalization can be a valuable and flexible estate planning tool. In its most basic form, a properly structured recapitalization can freeze the value of the owner's stock, potentially reducing the owner's estate tax liability by removing future appreciation in the value of the stock from the estate. Estate planners and tax counsel must understand the complex tax rules to avoid potentially costly consequences and achieve significant income tax savings.

When structuring a stock freeze, the owner of a closely held corporation recapitalizes the corporation by creating two classes of stock (common stock and preferred stock). The owner then transfers part of their interest in the business by gifting or selling the common stock while retaining a portion of the company in the form of the preferred stock. This allows any future appreciation in the business to be attributed to common stock transferred out of the owner's estate with the value of the retained interest remaining constant or frozen.

However, advisers must carefully navigate the technical rules of IRC Section 2701 or the transfer may result in a deemed taxable gift. In addition, advisers must also consider the tax rules and implications of recapitalizing with two classes of common stock, coupling a recapitalization with gifts of stock, distribution rights, qualified payments, and other vital issues.

Listen as our experienced panel provides a thorough guide to the benefits, risks, and structuring techniques of corporate recapitalization and stock freezes in estate planning.