IT’S NEVER TOO LATE TO REDEEM YOURSELF: REDEMPTIONS AS AN ESTATE PLANNING TECHNIQUE

By Lara N. Gilman, Esq. and Kristine Waggener, Esq.^*

When a client engages an estate planning attorney to assist with business succession planning, transfers of economic interests in the business usually top the list. The most common methods to accomplish these transfers are gifts (outright or in trust), sales of stock to family members, and Grantor Retained Annuity Trusts. Each method has advantages, but each also has drawbacks. For example, any gift of an amount over the client’s remaining lifetime exemption will be subject to a substantial gift tax. And if the client sells an interest in the business, capital gains tax will usually be imposed. As we discuss below, when the proposed transferee is already a part-owner of the business, redemption of the client’s interest by the business will sometimes be a more tax efficient means of transfer than either a gift or a sale.

I. HISTORICAL BACKGROUND

Redemption of corporate shares is the reacquisition of those shares by the issuing corporation. Treating redemption proceeds as a tax-free dividend has historically been an effective method for transferring an owner’s interest in a family-held S corporation. For owners of C corporations, however, redemptions have only recently become a useful planning strategy.