53rd ANNUAL TULANE TAX INSTITUTE New Orleans, Louisiana October 29, 2003

Transcription

1 5rd ANNUAL TULANE TAX INSTITUTE New Orleans, Louisiana October, 0 BUY-SELL AGREEMENTS The Author is grateful to Marjorie Morton Smith of my firm, and to my administrative assistants Julie Kyser, Marie Highnote and Becky Lindsey for their help in the preparation of this outline.

2 BUY-SELL AGREEMENTS Columbus, Georgia TABLE OF CONTENTS Page I. Introduction B. Overview of Matters to Consider C. Matters Covered by Agreement 1. Retention of Control 2. Creation of Market and Funding Mechanism. Establish Purchase Price and Estate Tax Value. Restrictions on Business Operations and Voting II. Establishment of Estate Tax Value B. Chapter 1 Special Valuation Rules 1. In General 2. Section 270. Legislative History. Treatment of Existing Agreements 5. Practical Considerations C. Current Law (Including 270) D. Review of All Requirements 1. Estate s Obligation to Sell 2. Methods for Establishing the Purchase Price a. Fixed Value b. Appraisal Value c. Formula Method of Value d. Agreed Value (with back-up ). Lifetime Transfers a. Practical Considerations b. Adoption of Agreement by New Purchaser. Bona Fide Business Arrangement Test

3 III. IV. Selecting Type of Buy-Sell Agreement A. Life Insurance Considerations 1. Amount of Insurance 2. Multiple Policies. Ownership. Proportionality B. Tax Considerations 1. Basis 2. Alternative Minimum Tax. Accumulated Earnings C. Other Factors Drafting The Agreement - Business and Personal Factors B. Restrictions on Lifetime Transfers 1. Transfer with Consent 2. Permitted Transfer to a Limited Class. Encumbrances C. Trigger Events 1. Death 2. Disability a. Definition of Disability. Termination of Employment. Voluntary Transfers 5. Involuntary Transfers D. Option vs. Obligation E. Voting Restrictions V. Funding the Agreement B. Installment Sales C. Funding Delayed Until Trigger Event D. Accumulation of Funds E. Shareholders as Purchasers F. Hybrid Funding VI. Alternative Minimum Tax Effect on Life Insurance B. The AMT Formula 1. The Book Income Adjustment 2. The Earnings or ACE Adjustment. Accounting for Life Insurance C. Effect on Life Insurance 1. Cash Value 2. Death Benefit D. Planning: Suggestions

4 VII. Role of Advisor Possible Conflict 26 VIII. IX. Partnership Buy-Sell Agreements A. Cross-purchase vs. Partnership Purchase B. Insurance C. Section 75 Special Concerns of S Corporations B. S Corporation Requirements C. Estates as Shareholders D. Trusts as Shareholders 1. Grantor Trusts 2. Qualified Subchapter S Trusts (QSSTs). Other Trusts. Possible Conflict of Interest 5. Inadvertent Terminations E. One Class of Stock 1. Letter Ruling Letter Ruling Revenue Ruling 85-1, 85-1 I.R.B. 22. Debt of S Corporation a. Straight Debt b. State Laws 5. History of Proposed Regulations 6. Final Regulations F. Handling Problems Unique to S Corporations 1. Voting Restrictions 2. Restrictions on Transfers. Restrictions on Corporate Activities. Distribution of Earnings 5. Election to Close the Books a. Examples b. Agreement to Close the Books X. Restructuring Agreement After S Election B. Continuation of Redemption Agreement C. Cross-purchase Agreement D. Changing from Redemption to Cross-purchase 1. Shareholders as Partners 2. Buy-out Life Insurance Trust E. Termination of S status F. Review of Existing Agreements XI. Conclusion

5 Exhibits Exhibit A Appraisal Method Valuation of Real Estate Partnership Exhibit A-1 Modified Book Value Method Adjusted for Accounts Receivable and Termination Pay Exhibit A-2 Modified Book Value Method Adjusted for Leasehold Improvements Exhibit B-1 Formula Method (Based on Asset Value and Earnings) Exhibit B-2 Formula Method (Based on Higher of Fixed Price or Book Value ) Exhibit C Agreed Value with Automatic Back-up Valuation Method Exhibit D Option in Corporation and Shareholders to Purchase During Lifetime Exhibit E Permission to Gift Shares to Family Members and Pledge Shares As Security for Loans Exhibit F Obligation to Sell and Obligation to Purchase Shares Upon Death of a Shareholder Exhibit G Obligation to Purchase Stock on Disability of Shareholder Exhibit G-1 Purchase of a Physician s Interest in the Partnership Owning The Medical Office Upon Termination of Employment by the P.C. Exhibit H Installment Sale Evidenced by Secured Promissory Note with Restrictions on Corporate Activity Exhibit I Purchase Price Payable in Cash to Extent of Life Insurance with Balance in Installments Exhibit J Purchased Stock Held as Security for Corporation s Installment Note and Restrictions on Corporate Activity Exhibit K Engagement Letter Exhibit L Provisions to Protect S Status of Corporation Exhibit M Provisions Regarding Distribution of S Corporation Income To Shareholders Exhibit N Requirement of Shareholder s Election to Close the Books Exhibit O Buyout Life Insurance Trust 5rd ANNUAL TULANE TAX INSTITUTE New Orleans, Louisiana October, BUY-SELL AGREEMENTS