Transfer of minority interest avoids estate tax

Article Abstract:

Internal Revenue Code Section 2036 requires that the value of transferred property be included in the estate of the transferor if: the transferor retains a right to the income of the property or the right to designate who will enjoy the income from the property; the right to vote transferred shares of a controlled corporation was retained; the retained right affects a transferal of a disproportionate share of the potential appreciation of an interest. The IRS has ruled in Ltr. Rul. 9026021 that transfers of minority interests in Subchapter S corporations and real estate partnerships where the transferor retains a major interest is not a retained interest under Section 2036. However, the IRS has ruled that agreements that freeze a taxpayer's share value for shares purchased by the corporation does result in a partial inclusion of the shares in an estate under Section 2036.

Laws, regulations and rules, Real estate, Estate planning, Real property, Revenue, Real estate limited partnerships

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S status is less advantageous after RRA '90

Article Abstract:

Provisions of the Revenue Reconciliation Act of 1990 have made the tax rate structure less advantageous for many subchapter S corporations. High-income taxpayers are in a 31% tax bracket, but two phase-out provisions affect marginal rates. The two new phase-outs may result in a tax rate of 33% or higher for taxpayers, depending on the number of exemptions. The rate changes have resulted in a 3% difference between the top individual marginal rate of 31% and the top effective corporate rate of 34%, a significant change from 1990, when there was nearly a 6% difference. Under the new rates, taxpayers should only elect S corporation status when the combined shareholder income and corporate income levels are higher.

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