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A Magical Mystery Tour Through the Chapter 14 Labyrinth – Practical Issues and Applications

Jan 15, 2024

At the 58th Annual Heckerling Institute on Estate Planning, N. Todd Angkatavanich of McDermott Will & Emery LLP; Amy E. Heller of Skadden, Arps, Slate, Meagher & Flom LLP; Kevin Matz of Arentfox Schiff LLP; and Adam K. Sherman of McDermott Will & Emery LLP offered a deep dive into Chapter 14 of the Internal Revenue Code, with a special focus on IRC Sec. 2701 and its complicated rules. Families that want to transfer business interests to future generations for purposes of minimizing transfer taxes most commonly use gifts or sales to Intentionally Defective Grantor Trusts to achieve their goals.  A less common technique is the recapitalization of a business by creating preferred and common interests, and assigning certain rights to the preferred interest in an effort to artificially increase its value in order to reduce the gift tax value of the common interest that the transferor is intending to transfer to his children.  IRC Sec. 2701 was introduced to curtail valuation abuses in the case of such a reorganization.   

The panelists reviewed a litany of potential missteps that planners encounter when structuring the type of freeze transaction described above so that it doesn’t violate the IRC Sec. 2701 rules and trigger unintended gift tax.  Topics covered, but were not limited to, valuation, structuring methods, strategies regarding payments and distributions, lapsing rights, attribution rules, restrictions on dissolutions and deemed gift provisions.  This is an extremely comprehensive subject that was better suited for a full semester course instead a brief session. 

At the end of the session, the panel discussed structuring private equity deals and hedge funds, and then tied this to estate and gift tax by mentioning the “vertical slice” technique used to circumvent the application of IRC Sec. 2701. 

The gist of this session was to alert estate planners to the complexity of Chapter 14 and how it can be inadvertently triggered.

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Charles Friedman

Charles Friedman is a Director in the firm's Private Client Services Group and has 40 years of experience in public accounting,

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