Some Stock-Redemption Considerations in Estate Planning
BY HENRY J. SEBASTIAN Partner, Honolulu Office
Presented before monthly meeting of Hawaii Estate Planning Council, Honolulu—November 1959
THE consideration of stock redemptions, as in the case of other phases of estate planning, should be a team effort. Stock redemptions
can affect many other features of estate planning and can likewise
be affected by many other features. Those features run the gamut from legal effects to fiduciary duties to insurance needs to accounting aspects. This discussion will not cover all of them, but perhaps it will give some idea of the scope. It will touch upon many things outside the responsibility of the accountant, because it is hard to get a perspective of any one group's responsibilities separately.
In the interest of avoiding too much technical discussion in a necessarily technical subject, I have oversimplified the points involved
in some cases. To those of you who recognize the technical shortcomings, as well as to those of you who may dislike the remaining
technicalities, I beg your indulgence.
The stigma that attaches generally to stock redemptions by closely held companies can be traced to the actions of taxpayers in the past. In their zeal to lighten the onus of taxation on corporate income distributed to stockholders, they sometimes were guilty of withdrawing the equivalent of cash dividends in the guise of stock redemptions. After straight-forward stock redemptions thus became tainted, even they, as a substitute for dividends, were disguised as something else. Instead of having a corporation redeem its own stock, the ever hopeful stockholders caused a related corporation—either a Sister company or a subsidiary—to buy the stock. Still others, in their pursuit of the elusive capital gains rainbow, attempted to attain their goal via another more devious route.
Since the object of the game is to get cash without surrendering control, or preferably without giving any voting power at all to outsiders, the simple expedient of selling voting stock is automatically disqualified in most cases. Accordingly, schemes were devised to get non-voting stock into shareholders' hands in some sort of tax-free