329 / Does a life insurance funded buy-sell agreement fix the value of a business interest for gift tax purposes?

No.

A buy-sell agreement is not necessarily based on the fair market value of the business. A buy-sell agreement is simply an agreement between friendly parties to address the smooth transition of ownership due to a business owner’s termination of employment, death, or sale of the individual’s business interest.¹ The IRS is much more likely to respect a buy-sell valuation as fair market value when the agreement is between unrelated parties.

An agreement restricting lifetime sale may be considered with all other pertinent factors, however, and may tend to lower the value of a close corporation or other business interest.²