Self-Dealing Exception During Administration of Estate or Revocable Trust

1. The administrator or executor of an estate or Trustee of a revocable trust either:
   1. possesses the power of sale with respect to the property,
   2. has the power to reallocate the property to another beneficiary, or
   3. is required to sell the property under the terms of any option subject to which the property was acquired by the estate.
2. The transaction is approved by a probate court having jurisdiction over the estate or trust.
3. The transaction occurs before the estate is considered terminated for Federal income tax purposes or before the trust becomes subject to IRC Section 4947 (Application of Taxes to Certain Non-exempt Trusts).
4. The estate or trust receives an amount which equals or exceeds the fair market value of the foundation’s interest or expectancy in such property at the time of the transaction, taking into account the terms of any option subject to which the property was acquired by the estate or trust.
5. The transaction either:
   1. results in the foundation receiving an interest or expectancy at least as liquid as the one it gave up,
   2. results in the foundation receiving an asset related to the active carrying out of its exempt purpose, or
   3. is require under the terms of any option binding on the estate or trust.

General Overview of Self-Dealing

IRC Section 4941 imposes a tax on any self-dealing transaction between a private foundation and a disqualified person. The tax is imposed in two levels. The disqualified person must pay a tax equal to 10% of the amount involved in the transaction. In addition, the foundation manager must pay a tax equal to 5% of the amount involved in the transaction. Further, if self-dealing act is not corrected within the taxable period involved, the disqualified person must pay an additional tax equal to 200% of the amount involved in the transaction and the foundation manager must pay an additional tax equal to 50% of the amount involved in the transaction. For these purposes, the taxable period begins on the date of the self-dealing transaction and ends on the earlier of i) the date of mailing of a notice of deficiency with respect to tax imposed by subsection (a)(1) under IRC Section 6212, ii) the date on which the tax imposed by subsection (a)(1) is assessed, or iii) the date on which the correction of the act of self-dealing is completed.

Self-dealing is generally defined as any transaction, whether direct or indirect, between a privation foundation and a disqualified person. A disqualified person includes, among others, any substantial contributor of the foundation, any foundation manager, family members of either of a substantial contributor or foundation manager, and trusts or estates of which any of the above have a beneficial interest of more than 35%.

For purposes of enforcing the self-dealing rules, where a private foundation has an interest expectancy in property held in an estate or trust, any transaction involving such property and a disqualified person is indirect self-dealing and the self-dealing taxes may be imposed on such transactions. However, there is an exception for transactions occurring during the administration of an estate or revocable trust as discussed above. In order to qualify for the exception, all five requirements must be met.