A buy-sell agreement sets the purchase price of your business at the time the agreement is made. It also allows you to set the value of the business now for estate-planning purposes. Down the road, this can help avoid future valuation problems with the Internal Revenue Service and avoid having a large portion of your estate go to estate taxes.
In order to set the estate-tax value of a partner's business interest, the buy-sell agreement must pass the following four qualifications:
- The estate must be obligated to sell the business interest at the price set in the buy-sell.
- The business interest must be subject to certain restrictions on lifetime transfers.
- The buy-sell must fix or determine the value of the business interest.
- The buy-sell must be a bona fide business arrangement, and cannot be a device to transfer the business to family members or others for less than full and adequate consideration.
Note: If your buy-sell agreement involves family members, you also must prove that the transaction is comparable to arms-length sales between unrelated persons, and prove that it was entered into for a bona fide business purpose.
Note: In order to determine the fair market value of your business, you may require the services of an independent business valuator. Understating the value of an asset for estate tax purposes risks high penalties from the IRS. Your business valuation should be updated from time to time throughout the life of your business.
First Commonwealth Bank and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.