Advice: Be careful when amending an older buy/sell agreement. If you make major changes in the terms, you could inadvertently wipe out an estate-tax break that’s been grandfathered under the law. A new case provides a clear-cut example.
Facts of the case: The co-owners of a construction company established a buy/ sell pact in 1981. Under the agreement, any departing owner or the owner’s estate had to first offer their stock back to the firm at a specified price.
But in later years, the owners decided that the agreement could tie up too much of the company’s capital. So they amended the buy/sell in 1996 to cut the redemption price.
Federal tax law says that purchase prices set in buy/sell agreements signed before Oct. 9, 1990, are generally binding for federal estate-tax purposes. But if major changes are made later, the agreement’s valuation may be disregarded under more recent tax rules.
As a result, the full fair-market value of a deceased owner’s shares had to be included in his taxable estate, instead of the lower value specified in the buy/sell. (Est. of Blount, 11th Circ., No. 04-15013, 10/31/05)
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