A Buy-Sell Estate Tax Checklist

The Internal Revenue Service (IRS) requirements for the valuation of a business through a buy-sell agreement for estate tax purposes are as follows:

1. The buy-sell agreement must be a bona fide arm’s length transaction.

2. The agreement must obligate the estate of the deceased shareholder to sell only to the surviving shareholders (who, in turn, are not obligated to buy the shares).

3. The agreement must prohibit all shareholders from disposing of their interests in the corporation during their own lifetimes without first offering those interests to either the corporation (in an entity plan) or the remaining shareholders (in a cross-purchase plan).

4. The price at the time of the agreement must be fair and adequate, except between family members, where it shall be fair market value (FMV) regardless of when the agreement is drafted.

5. The formula used to determine the price must be stated in the agreement.

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