7.9 Estate Freezes

• Library: Estate Planning in Virginia (Virginia CLE) (2018 Ed.)

7.9 ESTATE FREEZES

1Chapter 14 of the Internal Revenue Code addresses perceived abuses in the technique of "estate freezing." Estate freezing is the attempt by an estate planner to "freeze" the estate at its current value, allowing the client to retain most of the current income from the particular property, and providing that all future appreciation will inure to the younger members of the family.

This discussion is not a technical analysis of chapter 14 but rather provides an overview of I.R.C. § 2701, which most often affects corporate estate freezes, and describes estate-freezing techniques that are beneficial notwithstanding the enactment of chapter 14.

One of the traditional methods of freezing an estate is through a corporate recapitalization. In an estate-freezing recapitalization, two or more classes of stock are created, and the various rights and benefits of the two classes of stock are divided between members of different generations. For example, a parent owns a business that has a total value of $500,000, and the parent desires to involve his children in the business. The parent recapitalizes the equity of the company to create preferred stock that is entitled to

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receive dividends and $400,000 on redemption. The common stock created in the recapitalization has a value of $100,000 but has all rights to the future appreciation of the business. When the parent transfers the common stock to his child, he only makes a gift of $100,000 but the value of the gift is much greater.

Section 2701 may be triggered when stock in a corporation is transferred to a family member. If the family member retains an "applicable retained interest," which may be...