Trusts and Estates

Ca. Trs. & Estates Quarterly 2016, Volume 22, Issue 4


By Michael P. Varela, Esq.* and Richard Schachtili, Esq.**

Experienced estate planning practitioners know that an individual may transfer "qualified appreciated stock"1 to his or her private foundation and receive an income tax charitable deduction equal to the full fair market value of the stock as of the transfer date. This rule is an exception to the more general rule that, for purposes of the income tax charitable deduction, an individual transferring assets to a private foundation must treat the basis in his assets as the fair market value of those assets. However, before advising a client (particularly an officer, director, or other insider of a public company) that the stock transfer to his private foundation will receive the more favorable "fair market value" income tax charitable deduction, the practitioner must ensure that the stock being transferred does not have any hidden restrictions that might disqualify it as "qualified appreciated stock."

Where stock in a public company is subject to restrictions that would reduce the stock’s value, the IRS has held that market quotations for such stock are not readily available on an established securities market and, therefore, such stock does not qualify as "qualified appreciated stock." Accordingly, for stock to be treated as "qualified appreciated stock," the recipient foundation must not be limited or restricted in its ability to sell the transferred stock for the entire time that it holds the stock.

In general, the transferee foundation may not be free to sell otherwise publicly traded stock for three reasons: (i) the sale may violate federal insider trading restrictions, (ii) the stock was not obtained by the transferor through a public offering, or (iii) the sale may violate the company’s own insider trading policy.

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