Intra-Family And Other Business Transfer Techniques - Buy-Sell Agreements, Installment Notes, Self-Canceling Note
Buy-Sell Agreements are still the most common planning method used for the sale and continuation of small business interests. The buy-sell is a business continuity plan where the current property owner enters into an arrangement for the purchase and continuance of the property upon their death with another party.
Properties of the Buy-Sell Agreement:
- Guarantees a market for the business interest (liquidity).
- Owner can continue to operate business until their death.
- Avoids the probate process.
- Business is more attractive to creditors (continuity plan).
- Easier to determine the estate tax value of the business.
- Owner can choose to who they desire to sell the business interest (third party, family member, employees, etc.).
An installment sale is the taxable sale of a business or property where at least one principal payment is received in a year other than the year of the actual sale. The gain due to the sale of the property (in exchange for the installment note), will be delayed and recognized gradually over the installment period.
Payments for the property can exceed the lifetime of the seller; therefore, there is an estate inclusion of the present value of the remaining payments at the seller's death:Advantages:
- Favorable income tax treatment under installment accounting.
- Deferral of payments for buyer.
- Freezes gift/estate value and removes appreciation potential.
- Can be used to keep a business in the family.
Self-Canceling Installment Note
The self-canceling installment note (SCIN), is a variation of the installment note that includes a self-canceling provision at the seller's death. The SCIN is subject to the normal installment reporting rules, but is canceled if the seller dies before all principal payments are made to the seller. Because of the cancellation feature, these agreements usually carry a higher sales price.
SCIN features:Private Annuity, Transfers In Trust, Intra-Family Loan
- Buyer pays a higher price for a property or business.
- Installment payments end at the death of the seller.
- Nothing is included in the estate of the seller.
- No gift or estate taxes if equal value is exchanged.