Masonry Magazine August 1979 Page. 25
2. The economic outlook in general and the condition and outlook of the building and construction industry.
3. The book value of the stock and the financial condition of the business.
4. The earning capacity of the company.
5. The dividend-paying capacity.
6. Whether or not the enterprise has good will or other intangible value.
7. Any sales of the stock and the size of the block of stock to be valued.
8. Market price of stock of corporations engaged in the same or similar lines of business having their securities actively traded on an exchange or over-the-counter.
The Buy-Sell Agreement
The considerations outlined above would be necessary only if prior to death, the owners of the stock in a closely-held corporation had not entered into a buy-sell agreement for the disposition of his stock upon his death. As will be discussed below, a buy-sell agreement, if drawn properly, will fix the value of such stock for estate tax purposes. Unless the owner plans to gift his interest in the company to a son or other relative, the buy-sell agreement is the best way the owner can insure against valuation problems after his death.
The IRS has made it clear that as long as three basic requirements are incorporated into the buy-sell agreement, it will accept the dollar value placed on the business in the agreement for estate tax purposes. These requirements are:
* The agreement when entered into assigned a fair and reasonable value to the stock. An arm's length market value must be placed on the stock.
* The price of the stock in the agreement must control for a living sale as well as a sale at death.
* Upon death, the estate must be legally committed to the sale of the stock at the price in the agreement.
As you can see, the solution for fixing a value on the stock for estate tax purposes is really quite simple. But without a properly drawn buy-sell agreement your estate will most likely be in for a tax battle with the IRS.
What Makes A Good Estate Plan?
Professional estate planners generally attempt to accomplish four things when they draw up an estate plan. They attempt to minimize or eliminate excessive costs, to see that liquid assets will be available to pay estate taxes, to properly arrange patterns of distribution of the estate and to be sure there will be adequate future income for the surviving spouse and other loved ones.
The most common method for controlling estate costs is through the establishment of trusts. Irrevocable life insurance trusts are often used to reduce federal taxation. By relinquishing individual ownership of the policy and transferring ownership into the irrevocable trust, the size of the gross estate is reduced.
Estate liquidity is often a problem for an individual who is a principal in a closely-held corporation. All his cash is usually tied up in his business. Yet the law requires that after an individual's death, his executors must pay all federal estate taxes within nine months of the date of death. Without the ready cash or liquid assets to pay these taxes, the business could be subject to forced sale or liquidation. Life insurance is usually the best protection for the family and for the corporation to avoid this problem.
There is an option in the law which permits paying out these taxes over 15 years rather than paying in full at nine months. But this option presents many potential problems and is generally discouraged by professional estate planners. Interest is charged on the money owed. If more than please turn page
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MASONRY/AUGUST, 1979 25