We try to encourage people to not only plan for the transfer of their personal assets but also to plan for the transfer of their businesses – either in life or at death. Buy-Sell Agreements are beneficial documents when drafting a succession plan for a business.
It is however important to ensure that the buy-sell agreement is properly drafted so that the transfer of business interests is actually viewed as a legitimate sale rather than a gift. Internal Revenue Code §2703 governs the treatment of buy-sell agreements and states that a buy-sell agreement will be disregarded unless the agreement is:
- a bona fide business arrangement;
- not a device to transfer property to members of the family at less than full and adequate consideration in money or money’s worth; and
- its terms are comparable to arrangements made by parties in an arms’ length transaction.1
The purpose of these requirements is to ensure that the transfer of business interests is actually a valid transfer and not a gift of business interests. If the transfer is deemed a gift, there may be tax implications to the donor and the donee will receive the business interests at the donor’s original basis rather than at the value for which the business interest was purchased.
Oftentimes families think they can just transfer business interests to other family members without receiving any consideration, or less than adequate consideration, in return for the transfer. They do not however realize the implications of the transfer. It is important to consult with the proper professional before transferring business interests to fully understand all of the consequences.
If you have more questions about a buy-sell agreement, please contact an attorney to discuss the various options available to you and your business.
