Not All Stock Gifts Are Created Equal Some May Carry Hidden Limitations
Charities favor monetary bequests. Cash is king. In practice, legacy gifts arrive in different forms and are nonetheless always welcome. This bequest bit identifies issues that can devalue, or even derail, a testamentary gift of stock in a closely held business interest. The problem stems from either or both of two common provisions in partnership documents.
Transfer Provisions. Many business arrangements limit future ownership of shares to existing partners or specified family members. Courts uphold these provisions. Nonetheless, testators continue to gift these restricted interests to their favorite charities. In such cases, the impermissible bequest is void and the charitable beneficiary will receive nothing.
Valuation Provisions. Business agreements can sometimes dictate that the entity (e.g., a partnership) has the right to buy back shares at a predetermined price that may be significantly lower than market value. These valuation provisions are also usually valid. If a charity does acquire such private equity through a bequest, it will have no option but to sell the shares at a bargain price.
CCK TAKE-AWAY: It is easy to see how a transfer and/or valuation provision can frustrate a charity’s expectation of a major bequest. This situation is always disappointing and even more so if it impacts the charity’s financial plan in a significant way.
Gift planners sometimes deal with prospective gifts of business interests. If possible, the charity should review the governing documents during the donor’s lifetime to scout out any potential problems. At the very least, bequest managers must insist on access to relevant agreements if challenges to the organization’s entitlement emerge during probate. Business agreements are sometimes subject to competing interpretations and experienced counsel may be able to put the charity in a stronger position.
Although not involving charities, the recent case of Pappas v. B & G Holding Co., Supreme Court, Bronx County (New York), 2024 WL 4113909, illustrates perfectly how transfer and valuation restrictions like those discussed above can frustrate a testator’s estate plan and leave beneficiaries in a difficult situation. In that case, a Transfer Provision in a partnership contract voided a bequest of private equity to an “outsider.” The gift went to the residuary estate, which had but one viable alternative: selling it back to the surviving co-partner at a predetermined price thanks to a Valuation Provision.
(This blog was originally published on our LinkedIn on January 22, 2025.)