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Section 302 Stock Redemption Buy-Sell Agreement

August 22, 2011

Section 302 Stock Redemption Buy-Sell Agreement

 

Definition

A Section 302 stock redemption is a corporation’s purchase of its own stock which, when specific requirements are met, is subject to favorable tax treatment under Section 302 of the Internal Revenue Code. A stock redemption qualifying under Section 302 can occur during your lifetime or at your death. Although not a requirement, stock redemptions that qualify under Section 302 are often preplanned under an entity purchase buy-sell agreement (also referred to as a stock purchase agreement). When used after an owner’s death, a Section 302 redemption can provide the estate with liquidity for taxes and expenses. A Section 302 redemption can be used during an owner’s lifetime to dispose of some or all of the business interest. As long as certain specific criteria are met, the stock redemption can receive favorable tax treatment.
Prerequisite

  • You own a business organized as a corporation, together with one or more other individuals

Key Strengths

  • Lifetime redemption can qualify for favored tax treatment
  • Stock sale at death may qualify for additional favored tax treatment

Key Tradeoff

  • Favorable treatment of stock redemption may not apply to a redemption of shares in a family-owned corporation due to attribution rules
  • Redemption of shares that leaves corporation insolvent may be treated as a fraudulent transfer

Variations from State to State

  • Local laws could prevent corporate redemption
  • Community property laws could have impact in cases of divorce

How Is It Implemented?

  • Requires advance planning and determination of goals for business interest
  • Requires legal and tax assistance
  • Requires coordination with estate planning
  • Requires ongoing, periodic reviews once agreement established

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com,  access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

The Retirement Group is a Registered Investment Advisor not affiliated with  FSC Securities and may be reached at www.theretirementgroup.com.

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