This is a very specific form of a Buy-Sell Agreement, a PARTIAL STOCK REDEMPTION. It is worth mentioning as it can save thousands if not millions in tax dollars. However, be careful in that it can be used ONLY IN C OR S CORPORATIONS OR A FAMILY CORPORATION. It can not be used for sole proprietors or if there is only ONE stockholder in the corporation.
WHAT DOES IT DO? It allows the shareholders’ business to purchase its’ own stock at a shareholders death. Under Section 303, if you qualify, this transaction will be subject to CAPITAL GAINS TAX TREATMENT. The end result is a HUGE SAVINGS IN TAXES WITH VERY LITTLE OR PERHAPS AT TIMES WITH NO TAXES BEING PAID.
HOW DOES IT WORK? Your estate sells PART of your interest back to the corporation for CASH. This cash is used to pay Federal and/or New York state estate taxes, final expenses and various administrative expenses.
WHY WAS IT DONE? Section 303 was enacted by Congress to provide LIQUIDITY for a business. Business owners more often than not plow back a majority of their earnings into the business to make it grow. As such, cash on hand may often be relatively low and when cash is needed the most,it’s often at the wrong time.
CLOSING TIPS:
It bears repeating that a proper and often formal BUSINESS VALUATION be done. The value of one’s business must be at least 35% of your total estate and the Section 303 Redemption SHOULD be in a written BUY-SELL AGREEMENT. Careful coordination between your accountant, attorney and financial panner is crucial.