Transfer of Company to ESOP

[Guest svatty]

Husband and wife own all of the stock of a closely-held business. In the event of their deaths, they would like to "give" the company to their 20 or so employees. The value of the company is such that federal estate tax is a

consideration. An outright gift may be possible, but does not seem practical. Has anyone ever seen anything like this or have any creative thoughts as to how this might be accomplished in a tax-efficient manner, using an ESOP or otherwise. One thought I had would be to create a private

foundation at death and bequeath the entire estate to the foundation (deductible for estate tax purposes). I believe the Foundation would be required to disgorge most of the stock as an excess business holding. Perhaps the directors could be directed, or at least encouraged, to sell the

stock to the employees in an ESOP-based transaction? Of course, that is not the same as a gift, and a bargain sale is probably not possible as it would likely violate state law. Nevertheless, this approach might be something

the client would consider. Any thoughts about this, or other ideas, would be welcome.

[RLL]

svatty ---

This is an extremely complicated area under the IRC. A "gift" or a bargain sale by controlling shareholders to employees or to an ESOP would likely be treated as a compensatory transfer. (See the regs under IRC Section 83). A private foundation could not sell the stock to an ESOP for less than "fair market value." But there may be ways to accomplish what H & W want to do.

I recommend that you consult with counsel that's very experienced in ESOP transactions and estate planning.