A Simple Explanation of IRS Code 2703

In a nutshell, neither the IRS nor the courts will be bound for estate tax purposes to the price established in a buy-sell agreement unless the seller would in fact sell the interest to a totally independent non-family member for that price and that party (assuming reasonable knowledge of the relevant facts) would reasonably and without coercion pay that price.

Buy-sell agreements among related parties must now use an appraisal or a reasonable formula. Fixed prices set in buy-sells will probably not be accepted by the IRS or the courts as determinative of estate tax value no matter how reasonable when drafted.

Planners should review all buy-sell arrangements for compliance with the latest estate freeze rules and safe harbor requirements for buy-sell agreements. Many of these agreements should be revised to provide a more realistic price.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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