Home  >>  Financial Planning  >>  Individual Planning  >>  Financial Planning D...  >>  Tools to achieve you...  >>  Why Estate Planning?  >>  Ways for my Estate to Redeem Stock

Ways for my Estate to Redeem Stock

SECTION 303 STOCK REDEMPTION

Section 303 of the Internal Revenue Code permits a corporation to redeem all or a portion of a decedent's stock such that will not be taxed as a dividend. Redemption under Section 303 can provide cash for estate taxes and other expenses without the income tax consequences associated with the declaration of a dividend.

REQUIREMENTS

1) The value of the stock that is redeemed must be included in the gross estate of the decedent in calculating the federal estate tax.

2) For federal estate tax purposes, the value of the stock that was included in the decedent's estate must be greater than 35 percent of the adjusted gross estate. For the purpose of Section 303, adjusted gross estate is defined as the gross estate minus deductions for expenses, debts, and estate taxes.

3) There is a limit on the amount of stock that can be redeemed and still receive favorable tax treatment. This amount is equal to all estate, generation skipping and state inheritance taxes plus the funeral and administration expenses associated with the stockholder's death.

4) There is also a restriction on who can sell the stock in a Section 303 redemption. The corporation must purchase the stock from the person who is responsible for paying the estate taxes and administrative expenses.

In order for a corporation to redeem shares it obviously must have funds available. A convenient method to have these funds available could be to keep the funds on hand in a corporate account.

However, there is a potential problem with this strategy called "excess retained earnings." According to IRS regulations a corporation that has more than $250,000 may have "excess retained earnings" and be subject to a penalty.

SITUATIONS THAT MAY WARRANT USE OF SECTION 303

1) It would be advantageous to keep control of a closely held corporation.

2) The closely held corporation's stock represents a substantial portion of the estate and it is undesirable to liquidate the business for the purpose of paying estate taxes and administration expenses.

3) A plan to provide the corporation with the capital to redeem the stock has been implemented.

Section 303 rules are complex. While the above provides an overview, careful review by a competent tax or legal advisor is necessary to determine eligibility and application of Section 303.