EE—Reverse Section 303

A reverse stock redemption under Section 303 offers a very attractive way of paying estate settlement costs by having an entity other than the corporation purchase insurance to fund the redemption.

DURING LIFETIME.If the stock interest will bemore than35 percent of the stockholder’s adjusted gross estate, then his stock will qualify under Section 303 for a partial redemption at his death. Theamountof stock that can be purchased is limited to the sum of all federal and state death taxes, funeral, and administrative expenses. However, the purchase must be made from whoever has the obligation to pay these costs, usually the family or estate.

One way to implement a reverse Section 303 is for the stockholder to establish a life insurance trust. A life insurance contract insuring the stockholder is then obtained by the trust. The trust pays the premiums and is both owner and beneficiary of the contract.

UPON DEATH.The stock passes to the family or estate. At the same time, the insurance company pays a death benefit to the trust, which is received free of all income taxes. The trust then loans the money to the corporation, which uses it to purchasesome, but not all, of the stock from the family or estate.

In repaying this loan the corporation can make tax-deductible interest payments to the trust. Although these interest payments would be taxable income to the trust, repayments of the loan principal would be received by the trust free of income taxes. By this means the family can continue to retain ownership and control of the corporation, while at the same time receiving, as trust beneficiaries, the benefits of the untaxed repayment of loan principal.

Of course, it is not necessary for a trust to be established. Anyone who has substantial funds can loan them to the corporation for the purpose of a partial stock redemption. For example, a son or daughter of the stockholder could be owner and beneficiary of life insurance contracts insuring the parent. After receipt of the death benefit, the proceeds could be loaned by the children to the corporation, which would then repay the loan together with interest.