1977, March, Pg. 473. Estate and Trust Forum.

6 Colo.Law. 473

Colorado Lawyer

1977.

1977, March, Pg. 473.

Estate and Trust Forum

473Vol. 6, No. 3, Pg. 473Estate and Trust ForumThe Council of the Probate and Trust Law Section feels that the CPC Newsletter has been and should continue to be broader in scope and purpose than its name would reflect. Consequently, the name of this column has been changed to the Estate and Trust Forum. The column will continue to treat subjects of general interest to the Bar in the estate planning, probate and trust areas. Suggestions for topics may be sent to Judson W. Detrick, 1700 Broadway, Suite 1010, Denver, Colorado 80202.The Effect of the Tax Reform Act on Buy-Sell Agreements

The buy-sell agreement remains an important business planning and estate planning device after the Tax Reform Act of 1976 (T.R.A.). A properly drawn buy-sell agreement may promote the orderly disposition of the business interest of a disabled or deceased investor, fix the valuation of the interest for estate tax purposes, and provide needed liquidity to a decedent's estate. After T.R.A. 1976, however, these benefits may be achieved in some cases at a potentially substantial income tax cost. This column briefly elaborates that cost and discusses other changes resulting from the new legislation which affect the desirability of a buy-sell agreement.

Before and After the T.R.A.Under prior law, the income tax basis of property included in a decedent's adjusted gross estate was "stepped-up" to the federal estate tax value (i.e., the fair market value on the date of death or on the alternate valuation date).(fn1) Unrealized appreciation in the decedent's property escaped income taxation.

Consider a buy-sell agreement which provides that at a shareholder's death, his estate is bound to sell his company X stock at the then fair market value to the other shareholder. Assume shareholder A acquired his stock in 1970 for $3,000 and died January 1, 1976, when the stock was worth $15,000. The stock was included in shareholder A's estate at the $15,000 value. Under the old law, the basis of the stock was "stepped-up" to $15,000. Therefore, there was no taxable gain on the sale pursuant to the buy-sell agreement---there was no excess of the fair market value of the stock over its (stepped-up) basis.

As amended by the Tax Reform Act of 1976, the Internal Revenue...