One of the keys to a successful estate plan is the proper titling of assets. However, sometimes the retitling and transfer of assets can have unforeseen consequences. One such class of assets that deserves special attention are restricted securities. Generally, restricted securities
are stock or other equity instruments that are not registered with the Securities and Exchange Commission (“SEC”) and can only be sold if there is an exemption to the SEC’s registration requirements. There are a number of ways that a person might acquire restricted securities, including, through private sales, directly from an issuer in an early financing round, from a hedge fund, or as compensation for serving on a board of directors or through a stock option plan.
One way to sell restricted securities is to comply with SEC Rule 144. In order to comply with Rule 144, among other qualifications, you must hold the restricted securities for a period of at least one year in the case of nonreporting issuers, and at least six months in the case of reporting issuers. The good news is that the SEC will permit the “tacking” of holding periods between two owners in many basic estate planning circumstances. In other words, in certain transfers, the transferee will succeed to the holding period of the transferor and the clock will not
reset. For example, tacking is generally permitted for transfers of stock by a grantor to his revocable trust, transfers by gift, transfers by estates to their beneficiaries, in divisions of community property between spouses, transfers of stock in a divorce settlement, and contributions of stock by an owner to his wholly owned holding company. Even though these transfers permit the tacking of holding periods, the recipients of the stock should confirm the length of time that the transferor held the stock before entering into an agreement to sell the stock or transferring the stock further to ensure that the applicable holding period has been satisfied.
Notwithstanding the foregoing, transferees may not be able to tack the transferor’s holding period in many other classic estate planning situations. In general (and subject to some exceptions), if there is consideration for the transfer, the holding period will not tack. For example, a sale of stock by a grantor to a grantor trust will usually reset the holding period. Also, a contribution of stock to a partnership where there is a significant shift in the profits interests may prohibit tacking unless certain formalities are taken at or before the time of transfer of the restricted stock. Similarly, installment sales to family members may reset the holding period of restricted stock. While a one year or six month holding period may not be material in the grand scheme of an estate plan, consideration should still be taken to both tack the holding period and accomplish the client’s estate planning objectives.
Even if you are able to tack the holding period of the transferor, you must consider other restrictions on transfers, such as volume limitations if the stockholder is also an affiliate of the issuer, or if the proposed transfer of stock might cause the transferee to become an affiliate, or whether there are other documents, such as a stockholder agreement, operating agreement or company trading policy that may restrict transfers. Those considerations will be discussed in a