Succession & Estate

Buy-sell Agreements Binding for Estate Tax

Find out whether the price in your buy-sell actually fixes the estate tax value: the three statutory tests, the four common-law requirements that still apply on top of them, and the procedural failure that sank the most famous case in the field.

  • Expert
  • 10 min total
  • 12 chapters

What decision this helps you make: Whether to rely on a buy-sell price as the estate tax value of a business interest, and what the agreement and the operating practice have to look like for that reliance to survive examination.

What this topic is

The set of rules determining whether the transfer price in a buy-sell agreement controls the value reported on an estate or gift tax return, or is instead disregarded so that the interest is valued at fair market value without reference to the agreement. The modern framework is the statutory rule in §2703 layered on top of a set of common-law requirements developed under the regulations and case law, which continue to apply independently.

Why it matters

Families sign agreements setting a formula price and then plan as though that number is the estate tax value. Very often it is not. The consequence is a return filed at a low agreed price, an examination that values the interest far higher, tax assessed on a number the estate will never receive, and a family paying tax on value that went to the surviving owners. The gap is not theoretical: in the litigated cases it runs to multiples, not percentages.

Who should learn it

Owners of family and closely held businesses, estate planners drafting or reviewing buy-sell agreements, appraisers asked whether a price is binding, and executors deciding what value to report.

What you will understand

  • The four common-law requirements: determinable price, binding in life and at death, bona fide business arrangement, not a testamentary device
  • The three additional statutory tests under §2703 and the more-than-50%-non-family safe harbour
  • What "comparable to arm's length" actually requires you to prove, and how practitioners try to prove it
  • How agreements fail in practice, including the procedural failure conceded in the leading recent Supreme Court case

Prerequisites

Common misconception

"Our agreement sets the price at book value, everyone signed it, and it has been in place for twenty years, so that is the estate tax value." Age and unanimity do not help. A family agreement setting a below-market price is precisely what the statutory rule was written to disregard, and it must independently satisfy three tests, one of which requires the terms to be comparable to what unrelated parties would negotiate. A twenty-year-old book-value formula in a family company will usually fail at least two of them.