Purposes of a Buy-Sell Agreement

In Post 138, I raised the possibility that stock of a closely-held corporation might be deemed an inaccessible resource. Although not directly related to the elder law area, I think it would be helpful to discuss the purposes of a buy-sell agreement.

A buy-sell agreement has the following purposes:

1. To set the value for estate tax purposes
2. To provide liquidity to the estate of the shareholder
3. To prevent the beneficiaries of a shareholder from owing stock so that the remaining shareholder(s) can have the stock
4. If a stockholder is disabled, the stock can be purchased mandatorily.

Valuation of stock is set forth in Section 7203 of the Internal Revenue Code, which requires that stock can be valued in accordance with the industry.

Although the purchase of stock during lifetime can be optional, it must be mandatory upon death.

One might also provide that if a shareholder becomes disabled it is mandatory that the stock be purchased by the corporation. In the event such shareholder does not become disabled, the stock can be treated as key-man insurance. That is, such insurance would replace the value of the deceased shareholder to the corporation.

Disclaimer: This article does not constitute legal advice and each person may have unique facts for which legal consultation may be necessary.

© November 2011, Post 172