8876. How can a buy-sell agreement be useful in transitioning a family partnership?Alexis Longrcline202015-07-22T17:36:00Z2015-07-22T17:36:00Z24362489Summit Business Media2052920148876. How can a buy-sell agreement be useful in transitioning a family partnership?If a family partnership is formed between two spouses, in order to eliminate the possible problems and uncertainties that may arise, a buy-sell agreement should be formed between the partners. Moreover, each spouse should be assured he or she will have ample capital in order to purchase the decedent’s business interest. This may become necessary through failure of the decedent’s will (see Q 8875), if no will had been executed, through a change in a previously executed will, or because of creditors’ claims.Family members (or any other person) will be recognized as partners only if one of the following requirements is satisfied: (1) if capital is a material income-producing factor, they acquired their capital interest in a bona fide transaction (even if by gift or purchase from another family member), actually own the partnership interest, and actually control the interest; (2) If capital is not a material income-producing factor, they joined together in good faith to conduct a business. They agreed that contributions of each entitle them to a share in the profits, and some capital or service has been (or is) provided by each partner. IRS Publication 541 (December, 2013)One of the advantages of the buy-sell agreement is that the value of the business may be established through a valuation formula contained in the agreement (the valuation of shares is a frequent subject of litigation, with the IRS often taking the position that the estate has undervalued the reported value) . If properly established, the stated value should be accepted for federal estate tax purposes. A recommended method in the case of a family partnership is to have an independent certified public accountant establish and certify the true value, and to attach this certificate to the buy-sell agreement. See Q 8886 for a detailed discussion of valuation issues that arise in the context of a buy-sell agreement.Adequate life insurance is as essential in financing the buy-sell agreement, as would be the case were the parties unrelated. Since the spouses are partners in the business, each should carry life insurance upon the life of the other.If the surviving spouse is to carry on the business after the death of the first-to-die as legatee, rather than as purchaser under a buy-sell agreement, insurance on his or her life payable to the surviving spouse for business purposes is advisable, if not essential. Without a special fund available to satisfy partnership creditors and to hire the assistance necessary to do some of the work previously performed by the first-to-die, the surviving spouse may find it difficult to continue the business. With adequate life insurance proceeds at his or her disposal, and with adequate experience in the business gained as an active partner, the surviving spouse is given an opportunity to continue the business successfully.