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.