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THE NEW PROBLEMS. Internal Revenue Code Section 2701, effective for transfers after October 8, 1990, focuses on establishing the value of a transferred interest at the time of the transfer. Valuation of a closely held business interest is the "wild card" in an owner's estate planning. You are interest is in helping to establish this value because it defines the liquidity and amount of life insurance to be purchased. Recently enacted Code Section 2703 provides a general rule, effective after October 8, 1990. That rule is: For estate tax purposes, the value agreed upon between family members in a buy/sell agreement is to be disregarded.
Further, in general, the Revenue Reconciliation Act of 1990 (in which these new Code Sections are included) will attempt to maximize the gift tax value of intrafamily transfers by assigning a zero value to the retained interest unless the retained interest is entitled to "qualified payments" or is a qualified interest. In brief, a qualified payment means any dividend payable on a periodic basis at a fixed rate or comparable payment with respect to a family partnership. A qualified interest is like an annuity.
THE OPPORTUNITY. All buy/sell agreements between family members or others who may be considered other than "at arm's length" to the business owner must be reviewed and possibly revised.
This creates a whopping opportunity for those who wish to participate in the business life insurance sales market. To participate you need a prospect, a closely held business that is willing to let you render them a valuable service. If the closely held business does not have an attorney or accountant familiar with the new law, you need to associate yourself and your client with such a person. The operative thought is "participate." You learn...