Buy-Sell Agreements and Valuation Requirements

Special valuation rules (under Section 2703 of the Internal Revenue Code) apply to any family-owned business in which the family members control 50% or more of the voting or value of the company. Any buy-sell agreement, restriction or other similar factor relating to the use or sell property (or a business) will be ignored for estate, gift and generation-skipping transfer tax purposes unless the agreement meets all three of the following tests:

  • It is a bona fide business arrangement.
  • It must not be a device to transfer the property to the natural objects of the transferor’s bounty (such as family members) for less than full and adequate consideration in money or money’s worth.
  • Its term must be comparable to similar arrangements entered into by persons in an arm’s length transaction.

Agreements put in place prior to October 8, 1990 will be "grandfathered" under the law, however those arrangements substantially modified after this date will be required to follow the rules of Section 2703.