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Federal Estate Tax Implications

Staff Writers

According to some tax experts, the US Tax Court suggests several generally accepted factors for making a medical practice buy-sell agreement valuation price binding for Federal estate tax purposes. 

Acceptable Factors

For example, among other items, the medical practice buy-sell agreement must include the following factors for Federal estate tax purposes: 

• The price must be fixed or determinable;
• The agreement must be binding on the parties during life and after death;
• The buy-sell must have been entered into for bona fide business reasons;
• The buy-sell must not be a substitute for testamentary disposition.

Reasons for Rejection

Yet, the courts have occasionally rejected using the price specified in a
buy-sell agreement to establish value for Federal estate tax purposes. Reasons for rejection may include:  

• The purchase price was not subject to any re-evaluation;
• The payment terms were too generous (indicating the testamentary nature of the agreement);
• The price was not supported by a professional fair-market valuation at the time the agreement was created. 

Assessment

Of course, the courts are likely to scrutinize any buy-sell agreement if the specified value does not reflect a current fair market value for the medical practice/clinic business entity. 

Conclusion

Physicians must make sure that their medical practice buy-sell agreements are backed by sound valuation principles that are acceptable in US Tax Court. 

And so, what are your experiences – if any – with this emerging and important situation?

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Filed under: Practice Worth | Tagged: Estate Planning |