What Are The Tax Consequences Of Naming An Employee As A Devisee
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I. QUESTION PRESENTED
1. What are the tax consequences of naming an employee as a devisee in a Will?
2. How may Mr. Dutton effectively name some of his long-term employees as devisees to $50,000 in his Will?
II. SHORT ANSWER
1. The tax consequences of naming an employee as a devisee in a Will are unclear under current interpretations of the Duberstein standard and section 102(c) of the tax code. If the transfer is structured properly, it appears the transfer can be made income tax free to the employee but only if the proper relationship exists between the employer and employee. Even if the transfer is able to successfully evade income tax, it will still potentially be subject to estate tax.
2. To effectively name certain long-term employees as beneficiaries of a $50,000 devise in his will, Mr. Dutton must select only those employees who have both an industry standard salary and a significant non-work relationship with him. The Will itself should also contain a clause disavowing any economic benefit or future services in return for the devise.
III. STATEMENT OF FACTS
Paul Dutton currently is employed by a company he owns a fifty percent share in, Acme Auto Parts, Inc. He has asked us to revise his current will and would like to be able to divide $50,000 of his wealth between several of his long-term employees upon his death.
a. Income Tax Consequences of Devise to Employee
The tax code provides that an individual’s gross income does not include the