Does a buy-sell agreement's price determine estate tax value?

The statute starts from disregard

Section 2703 generally disregards an agreement or right to acquire property below fair market value when federal estate tax value is determined. The section provides exceptions to disregard, but an exception does not itself establish estate tax value.

Conditions practitioners describe for an agreement to count

The three conditions concern an exception to disregard of an agreement for valuation purposes. Each condition stands on its own, so meeting one does not satisfy the others.

Transfer restrictions that apply during life are described as part of the same package.

• The agreement has a business purpose.
• The agreement is not a device to transfer property to family members.
• The agreement terms are comparable to arm's-length arrangements.

Lifetime freedom to sell reduces the weight of a price

The regulation says little weight is accorded a price in an option or contract under which the decedent was free to dispose of the underlying securities at any price during their lifetime.

A share redemption agreement can still contain a price formula. A Supreme Court decision addressed whether that formula sets the value of the shares.

Family ownership and other transfer taxes

Agreements among family members receive close attention.

The same starting point appears outside the estate tax. Practitioners note that options, rights, agreements or restrictions in buy-sell agreements are generally disregarded for gift, estate or GST tax purposes unless an exception applies.

Common questions