A Simple Explanation of IRS Code 2703

A Simple Explanation of IRS Code 2703

In a nutshell, neither the IRS nor the courts will be bound for estate tax purposes to the price established in a buy-sell agreement unless the seller would in fact sell the interest to a totally independent non-family member for that price and that party (assuming reasonable knowledge of the relevant facts) would reasonably and without coercion pay that price. Buy-sell agreements among related parties must now use an appraisal or a reasonable formula. Fixed…

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What Should be Done When a Corporation Changes From a Stock Redemption to a Cross Purchase Agreement?

What Should be Done When a Corporation Changes From a Stock Redemption to a Cross Purchase Agreement?

In the case of corporation changes to a cross purchase from a stock redemption (perhaps to avoid or minimize the impact of any corporate AMT), planners should consider leaving currently owned corporate insurance on a reduced paid-up basis (the cash values in the policies pay future premiums but the death benefit is reduced) and using that corporate coverage as key employee insurance. Parties to the agreement can then purchase new coverage without fear of violating…

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The Use of Life Insurance With Buy-Sell Agreements

The Use of Life Insurance With Buy-Sell Agreements

It is highly recommended that if at all possible the buy-sell be fully funded from inception. This is because the value of a business interest (and therefore the need for cash to buy that interest) increases because of the real value increases in the interest itself as well as because of inflationary growth. For instance, a business interest worth $500,000 today enjoying a 6 percent real growth and a 4 percent inflationary growth will be…

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Tax Considerations to Know with Buy-Sell Agreements

Tax Considerations to Know with Buy-Sell Agreements

If you have a buy-sell agreement, you may be able to write off the money you paid for the policy that you later sold. Although the rules are very complex, there are certain things you can do to keep the IRS happy. Premiums used to fund a buy-sell agreement are not deductible regardless of who (the corporation, shareholders, or a third party) owns the policy. Planners should therefore consider the comparative tax brackets involved in…

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4 Methods of Using Buy-Sell Agreements

4 Methods of Using Buy-Sell Agreements

There are many different ways to be protected by a life insurance policy. This article gives you 4 different methods to add to your existing policy. Buy-sell agreements can take a number of forms based on the tax and other objectives and circumstances of the parties to the contract: Stock redemption – In this type of buy-sell arrangement, the business itself purchases the shareholder’s interest upon the triggering event, preferably according to a formula-determined price….

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Requirements of Buy-Sell Agreements

Requirements of Buy-Sell Agreements

This guide will show you the requirements of buying and selling insurance policies and how to negotiate a buy-sell agreement. Buy-sell agreements are used to accomplish many important estate planning objectives, the four most important of which are: To create a market for a shareholder’s stock which in turn reduces or eliminates the liquidity problems created by the ownership of closely-held stock and helps the owner harvest the fruit of his or her labor. To…

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Disadvantages of Buy-Sell Agreements

Disadvantages of Buy-Sell Agreements

There are disadvantages and costs to using a life insurance-funded buy-sell agreement. Understanding them will make a major difference in the choices made regarding policies. This article will explain the top three disadvantages, which include: Premiums must be paid with after-tax dollars. Uninsurable shareholders present a problem. Planners should note, however, that very few individuals are refused insurance because of age or physical health. Most insurers will agree to cover almost any age (up to…

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8 Advantages of Buy-Sell Agreements

8 Advantages of Buy-Sell Agreements

There are a number of advantages to using a buy-sell agreement. Understanding them will make a major difference in the choices made regarding policies. This article provides an overview of the top 8, and they include: Life insurance funding has a relatively low cost, is simple to explain and implement, and will not adversely affect the working capital or credit position of the business. Life insurance is the only means of guaranteeing that death—one event…

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5 Situations That Call for the Use of a Buy-Sell Agreement

5 Situations That Call for the Use of a Buy-Sell Agreement

When it is essential or desirable to create a market for a business interest upon the death, long-term disability, retirement, divorce, or bankruptcy of an owner. When a shareholder is unwilling or unable to continue running a business with the family of a deceased co-stockholder or someone outside the business. When the continuation of a business at an owner’s death involves a high amount of financial risk and it is desirable or necessary to convert…

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A Brief Introduction to Buy-Sell Agreements

A Brief Introduction to Buy-Sell Agreements

A buy-sell agreement is a legal contract restricting the right to dispose of a business interest to specified parties according to specified terms. Typically, this arrangement requires a sale of the business interest, at a formula-determined price, upon one or more of the following triggering events: Death Disability Retirement Withdrawal from the business at some earlier time In some cases upon attachment of the owner’s property by creditors or in a divorce These triggering events…

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