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Section 303 Stock Redemption Buy-Sell Agreement

August 22, 2011

John Jastremski Presents:

 

Section 303 Stock Redemption Buy-Sell Agreement

 

Definition

A Section 303 stock redemption is a closely held business’s purchase of its own stock at an owner’s death, which, when specific requirements are met, is subject to favorable tax treatment under Section 303 of the Internal Revenue Code. A formal buy-sell agreement is not required to sell corporation stock under Section 303, but it is highly recommended, especially for a minority shareholder. Stock redemptions under Section 303 must meet very specific tests, so it is important that some advance planning is done with an estate or financial planner, tax advisor, and/or lawyer. Congress enacted Section 303 specifically to help ease the liquidity problem faced by estates comprised largely of an interest in a closely held corporation.
Prerequisites

  • You own a closely held corporation with one or more other individuals
  • Your business interest comprises at least 35 percent of your adjusted gross estate

Key Strengths

  • Lets the surviving family members do something the owner couldn’t do–redeem part of the family business interest without dividend tax
  • Even if the estate doesn’t need the money, it can still use the Section 303 stock redemption
  • Section 303 stock redemption can be used even if estate taxes are paid in installments
  • Section 303 stock redemption can be used with other types of buy-sell agreements
  • Protects family corporation from forced sale or liquidation to pay estate taxes and settlement costs–allows your estate to use corporate money to pay these taxes and expenses
  • Attribution rules do not apply

Key Tradeoffs

  • Amount of stock that can be redeemed under Section 303 is limited
  • Must be coordinated with terms of will and other estate and tax planning
  • May have limited usefulness to surviving spouse if full marital deduction used
  • Corporate accumulations to fund redemption may be subject to accumulated earnings tax

Variations from State to State

  • Community property laws could have impact in cases of divorce
  • Local laws could hamper the corporation’s ability to set aside cash for stock redemption

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, especially analysis of business ownership relative to total estate

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of John Jastremski, Jeremy Keating, Erik J Larsen, Frank Esposito, Patrick Ray, Robert Welsch, Michael Reese, Brent Wolf, Andy Starostecki and 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.

John Jastremski is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

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