36. Stock Redemption - Section 303

Individuals, like you, who own their own corporations usually tie up the majority of their personal assets in the business. Not only have your personal assets been invested in the corporation, your hard work creating profits and reinvesting those profits has resulted in a growing enterprise.

Naturally, you want your hard work and success to benefit your family when you die. Since the corporation represents the principal asset in your estate, you must ask yourself this crucial question: "Does your estate have the cash to pay estate taxes, debts, and estate settlement expenses?"

You have probably invested most of your cash and liquid assets in the corporation - the liquid assets required to pay the IRS, the State, your creditors, your executor, and your attorney. In order to obtain the needed liquid funds, business assets like equipment and inventories may have to be converted to cash by virtue of a forced sale. A forced sale results in the realization of pennies on each invested dollar.

Section 303 of the IRS provides relief for this situation. Section 303 allows the corporation to buy stock from the estate to pay death taxes, funeral expenses, and the cost of estate administration - income tax free

To be eligible for a Section 303 stock redemption, the stock must be included in your gross estate for estate tax purposes, and the value of the stock must comprise more than 35% of your "adjusted gross estate".

The corporation must redeem the stock out of corporate surplus, and the redemption must generally occur within four years after death.

A second crucial question is, "Will your corporation have the liquid funds guaranteed at death to carry out the Section 303 redemption?" Life insurance,

1. Assures the cash is available to the corporation when needed.

2. Assures that the redemption will occur within the four-year period.

3. Guarantees the cash proceeds to the corporation income tax free.

4. Increases the corporate surplus

5. Prevents the depletion of the cash account and other working capital accounts.

6. Avoids the need for bank borrowing.

7. Avoids accumulated earnings tax problems.

A section 303 redemption funded by life insurance, owned and paid for by the corporation, solves the estate liquidity problem for many corporate business owners.

Tax reference verification 1-800-829-1040

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