In many cases, a family-owned corporation may not want a complete stock redemption buy-sell plan that gives a majority interest in the business to an unrelated third party. The problem is that even in a small business, estate taxes and settlement costs can siphon off cash flow and put a serious dent in operating capital.

When keeping a business in the family is the objective, the solution might be the Section 303 Partial Stock Redemption.

A Section 303 Partial Stock Redemption can provide a tax-favored source of funds to settle a businessowner's estate and assure the transfer of the business interest to a family member as a going concern. A variation of the entity-purchase/stock redemption plan, this arrangement enables a shareholder's estate to sell a portion of the stock back to the corporation at the time of death, and use the proceeds to pay estate taxes and other estate settlement costs.

A formal agreement may not be needed where an executor will acquire the controlling interest in the corporation. But in the case of a minority owner, a Section 303 redemption must be established as a formal, legally binding agreement between the corporation, which promises to buy an appropriate portion of the stock at death, and the shareholder, who binds his or her estate to sell the stock to the corporation.

To fund the Section 303 redemption, the corporation owns, pays for, and is beneficiary of insurance on the life of the shareholder. The face amount should equal the individual's estimated estate settlement costs, and should be reviewed periodically. At death, the corporation receives the insurance proceeds tax free (except for the alternative minimum tax), and uses the money to redeem the stock from the estate under the terms of the agreement, as illustrated.

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