302 / Can an executor avoid attribution of stock ownership from an estate beneficiary to the estate by distributing the beneficiary's legacy before the redemption of the estate-held stock?

As a relief provision, regulations state that, "A person shall no longer be considered a beneficiary of an estate when all the property to which he is entitled has been received by him, when he no longer has a claim against the estate arising out of having been a beneficiary, and when there is only a remote possibility that it will be necessary for the estate to seek the return of property or to seek payment from him by contribution or otherwise to satisfy claims against the estate or expenses of administration."¹

Thus, estate-beneficiary constructive ownership rules can be avoided, in some instances, by distributing a beneficiary-shareholder's legacy to the beneficiary-shareholder before redemption takes place. Many states have apportionment laws calling for allocation of estate taxes among estate beneficiaries in all cases where a decedent did not direct otherwise by will.

If distribution of a legacy to a beneficiary-shareholder in one of those states occurs before payment of estate taxes or without deduction for a beneficiary's share of the taxes, the shareholder still will be considered a beneficiary of the estate within the meaning of the regulation even after the distribution.²

Moreover, even if a shareholder's legacy has been distributed to the shareholder and he or she no longer has any claim against the estate, or the estate against the shareholder, if a member of the shareholder's family remains a beneficiary of the estate, the shareholder's shares may be attributed to the estate through the family member.³

The relief provision under Treasury Regulation Section 1.318-3(a) is not available if a residuary legatee of an estate owns stock, because a residuary legatee's interest in the estate does not cease until the estate is closed.⁴

Moreover, if a trust is a beneficiary of an estate and a surviving shareholder is a beneficiary of the trust, the surviving shareholder's stock will be attributed to the trust and through the trust to the estate.⁵