Buy-sell agreements that contain a clause that values stock at less than fair market value can be disregarded for tax purposes. It is important to consider the requirements of Internal Revenue Code (IRC) Section 2703 when developing an estate plan involving business interests in which 50% or more of the stock is family owned.
Section 2703(a) states that a shareholder agreement (entered into after October 8, 1990) that allows for the acquisition or transfer of property at a price that is less than fair market value will be ignored for estate and gift tax purposes. With respect to buy-sell agreements, Section 2703 provides that such agreements will set the value of shares for estate tax purposes if the agreement is binding in life as well as at death and results in the shares being transferred at fair market value.
Also, the buy-sell agreement must meet these requirements:
- It is a bona fide business arrangement.
- It is not a device to transfer property to members of the decedent’s family for less than full and adequate consideration.
- Its terms are comparable to similar arrangements entered into by persons in an arms-length transaction.
A buy-sell agreement is deemed to meet the three requirements if more than 50% of the business enterprise is owned by individuals who are not members of the transferor’s family.
A business owner’s estate plan and succession plan can be interrelated in other ways as well. Exit Strategies does not provide tax counsel, but we connect owners with competent tax professionals. Our accredited business valuation experts appraise privately held businesses and fractional interests for buy-sell, tax, exit planning and many other purposes. Contact Al Statz at 707-781-8580 with any questions or to discuss a current need.