Business – Safe Retirement Income

FIXING THE VALUE OF YOUR BUSINESS FOR ESTATE TAX PURPOSES

What Conditions Must Be Met to Fix the Value of Your Business for Estate Tax Purposes?

If certain conditions are met, a binding buy-sell agreement may fix the value of a business interest for estate tax purposes. The purchase price, whether a fixed amount or one determined by a formula, can be accepted as the estate tax valuation if these conditions are met:

1. The buy-sell agreement must create an enforceable obligation on the part of the estate of the deceased owner to sell and the buyer to purchase the business interest.

2. The buy-sell agreement must prohibit the owner from disposing of his or her business interest during lifetime without first offering it to the other parties to the agreement at a price not higher than the price (fixed or formula) specified in the agreement.

3. The buy-sell agreement must be the result of an “arm’s length” transaction, meaning that the price must be fair and adequate at the time of the agreement or any subsequent reevaluation.

Without a binding buy-sell agreement, there can be a great deal of additional detail and uncertainty as to the valuation of a business interest at the owner’s death, adding to the time and expense required to settle the estate, as well as making it difficult to predict and plan for any estate taxes that may become payable.

Enhancing Dollars through Tax Bracket Planning

Did You Know That…

Tax brackets have an impact on funding insurance solutions to the needs of closely-held corporations and their shareholders?

For example, a corporation in the 21% tax bracket gets to keep 79 cents of every taxable dollar it makes, while an individual in the 35% tax bracket gets to keep only 65 cents of every taxable dollar he or she makes. Since life insurance purchased to fund a buy-sell plan must be paid for with after-tax dollars, it may make more sense to pay the premiums with 79 cent dollars as compared to 65 cent dollars.

Impact of Tax Brackets on Buy-Sell Planning

Lower bracket corporation — If the corporation is in a lower tax bracket than the shareholders, a stock redemption buy-sell plan can be funded with enhanced dollars since the corporation pays premiums. Higher bracket corporation — If the corporation is in a higher tax bracket than the shareholders, a cross-purchase buy-sell plan may be more cost effective since premiums are paid with enhanced dollars by each shareholder.

Conversely, the marginal tax brackets of the corporation and shareholder-employees can have an impact on the total cost of a selective benefit plan. Benefits provided to corporate employees on a selective basis generally are either tax-deductible by the corporation or are not currently taxable to the employee, but not both. As a result, the relative impact of tax brackets should be considered in selecting an executive benefit plan that produces the most advantageous overall tax results.

Impact of Tax Brackets on Executive Benefit Planning

Lower bracket corporation — When the corporation is in a lower tax bracket, selective benefits that are nondeductible by the corporation and non-taxable to the shareholder-employee generally produce the better overall tax results.Higher bracket corporation — When the corporation is in a higher tax bracket, selective benefits that involve tax-deductible corporate payments are generally more advantageous, even if taxable to shareholder-employees.