Buy-sell arrangements can be effectively designed to control ownership of closely held companies and provide for the fair and orderly liquidation of the interests of departing or deceased shareholders or partners. However, Section 2703 of Chapter 14 of the Internal Revenue Code limits the effectiveness of buy-sell agreements in freezing the value of closely held business interests for estate planning purposes. For transfers after October 8, 1990, buy-sell agreements that do not meet all three of the following criteria will be ignored for estate, gift and generation-skipping tax purposes:

1. It is a bona fide business arrangement.
2. It is not a device to transfer the property to the natural objects of the transferor’s bounty (such as family members) for less than adequate consideration in money or money’s worth.
3. Its terms are comparable to similar arrangements entered into by persons in arm’s length transactions.