Fixing the Value of your Business
What Conditions Must Be Met to Fix the Value of Your
Business for Estate Tax Purposes?
If certain conditions are met, a binding buy-sell agreement may fix the value
of a business interest for estate tax purposes. The purchase price, whether a
fixed amount or one determined by a formula, can be accepted as the estate
tax valuation if these conditions are met:
- The buy-sell agreement must create an enforceable obligation on the part
of the estate of the deceased owner to sell and the buyer to purchase the
- The buy-sell agreement must prohibit the owner from disposing of his or
her business interest during lifetime without first offering it to the other parties
to the agreement at a price not higher than the price (fixed or formula)
specified in the agreement.
- The buy-sell agreement must be the result of an “arm’s length”
transaction, meaning that the price must be fair and adequate at the time of
the agreement or any subsequent reevaluation.
Without a binding buy-sell agreement, there can be a great deal of
additional detail and uncertainty as to the valuation of a business interest at
the owner’s death, adding to the time and expense required to settle the
estate, as well as making it difficult to predict and plan for any estate taxes that
may become payable.