IRS 2703

From TaxAlmanac

Irs Sec 2703 Rules Regarding Fixing an Estate Value to a Business, Succession Planning

When setting up a succession plan you must have a basic valuation of your business. So you and your partners get together and come up with an agreed value, put it in the meeting minutes and your all finished, right? Maybe; there are a few rules that do apply to business valuation that many CPA's and lawyers do not even know about. The rules are vague and can cause problems if not properly executed.

Basic rules:

1. Price must be fixed or determined according to a formula which is fair and reasonable when established.

2. No party to the agreement can transfer an interest during life without prior offer to the other parties at price set in the agreement. (In other words if you want to give a portion of your business to your son/daughter ect. you must first offer that portion to your partners)

3. Estate must offer to sell to the other parties at price set in the agreement. (This one has a special twist, it requires the estate to offer to sell but does not require the business to buy. Be careful with this one, consult your advisor and make sure to add wording that requires the business to buy out the estate at the set and fair price, this will ensure that your hiers will get the proper amount and can sell their shares).

4. Agreement must be a bona fide business arrangement and not a device to pass decedent's share to the natural objects of his bounty for less than the full and adequate consideration.

Ok so that is succession planning 101, however, we need to talk about IRS Sec 2703, here is a summary of how it reads. This section applies if more than 50% of the business is owned by family members.

1. Must be a bona fide business arrangement and not a device to transfer decedent's property to members of his family for less than full and adequate consideration.

2. Terms of the agreement must be comparable to similar arrangements entered into by persons in arms' length transactions. (This part says that a set price determined by the parties will not suffice. Agreed value does not fix estate tax value! This means that this will be subject to estate tax based on the IRS estate tax value and not the agreed value).

3. Siblings are considered family members for these purposes.

Hopefully this was helpful, because every business is different and family situations do vary please consult your advisor. The best option to ensure that all of your interest in your business is transfered properly is to have a succession plan in place and have it done early. You will want to revisit your plan at least every 2 years to ensure that it is up to date.