Rule Atlas
IRC § 2703: Business Succession Planning: Buy-Sells, Valuation, and Family Transfers
Under IRC § 2703 (CFP Board / IRS / SEC), business Succession Planning: Buy-Sells, Valuation, and Family Transfers establishes the authoritative rules tested on the CFP® Certification. Master the critical CFP® exam topics of business succession. VoraPrep verifies every threshold, worked table, and practice question below against the current CFP® Certification blueprint.
Current Statutory Thresholds & Limits in Effect
Comparison: Cross-Purchase vs. Entity-Purchase
| Feature | Cross-Purchase Agreement | Entity-Purchase (Stock Redemption) Agreement |
|---|---|---|
| Buyer of Interest | The surviving owners, individually. | The business entity itself. |
| Number of Policies | N * (N - 1) | N |
| Basis for Survivors | Receive a step-up in basis. | NO step-up in basis. |
| Complexity | High (becomes unmanageable with > 4 owners). | Low (simple and scalable). |
| Transfer-for-Value Risk | High, unless an exception applies (e.g., partnership). | Low, as the business buys back shares directly. |
| Creditor Exposure | Policy cash values are personal assets, protected from business creditors. | Policy cash values are business assets, exposed to business creditors. |
Michael Chen, age 62, owns 100% of Chen Manufacturing Inc., a successful S-Corp valued at $10 million. He plans to transition the business to his two children and is concerned about potential estate taxes. His primary goal is to minimize the valuation of the business for transfer tax purposes while retaining family control. He currently has a buy-sell agreement that transfers ownership at fair market value upon his death. Which of the following strategies would best achieve his primary goal of valuation reduction?
Example: Calculating Policy Requirements
Scenario. Consider Nova Consulting, an S-Corporation owned equally by four partners — Maria, David, Priya, and Leo — each holding a 25% interest. The business is currently valued at $8 million ($2M per partner). The partners want to adopt a buy-sell agreement funded by life insurance so that when one partner dies, the survivors can buy out the deceased partner's family cleanly at a defensible valuation. They are debating between a CROSS-PURCHASE structure and an ENTITY (REDEMPTION) structure. Which do you recommend, and how many life-insurance policies does each require?
- Step 1: Count the owners (N). N = 4.
- Step 2: Calculate policies required under CROSS-PURCHASE. Each owner must own a policy on every OTHER owner. Formula: N × (N − 1). For 4 owners: 4 × 3 = 12 policies total. Maria owns policies on David, Priya, and Leo (3 policies). David owns policies on Maria, Priya, and Leo (3 policies). Same for Priya and Leo. Grand total: 12 policies to underwrite, own, pay premiums on, and administer.
- Step 3: Calculate policies required under ENTITY (REDEMPTION). The S-Corporation itself owns policies on each owner's life. Formula: N. For 4 owners: 4 policies total. The corporation is the owner and beneficiary of each. Simpler administration, uniform coverage.
- Step 4: Weigh the BASIS-STEP-UP trade-off. The policy count is not the only consideration. In CROSS-PURCHASE, when a partner dies, the survivors DIRECTLY purchase the deceased partner's shares at fair market value — receiving a stepped-up cost basis on the purchased portion. This basis step-up can be worth six or seven figures in avoided capital-gains tax if the survivors later sell.
Common CFP® Certification Distractors on IRC § 2703
- 1Every business-succession question on the CFP exam follows the same underlying structure. Use this 5-step decision framework and you'll rarely miss one:
- 2Think of a Cross-Purchase agreement as creating a 'criss-cross' of life insurance policies. Every owner has a policy on every other owner, creating a web of criss-crossing obligations. This visual helps remember the complexity and the N * (N - 1) formula.
- 3Business succession planning is essential for ensuring a smooth transition and providing liquidity for an otherwise illiquid asset.
- 4Buy-Sell Agreements: Choose between a cross-purchase (step-up in basis, complex, transfer-for-value risk) and an entity-purchase (simple, no step-up in basis). The number of owners is the primary deciding factor.
- 5Family Business Transfer: Utilize strategies like gifting, installment sales to IDGTs, or GRATs to transfer ownership tax-efficiently.
Frequently Asked Questions: IRC § 2703
What is the core rule under IRC § 2703 (Business Succession Planning: Buy-Sells, Valuation, and Family Transfers)?
Under IRC § 2703 (CFP Board / IRS / SEC), business Succession Planning: Buy-Sells, Valuation, and Family Transfers establishes the authoritative rules tested on the CFP® Certification. Master the critical CFP® exam topics of business succession. VoraPrep verifies every threshold, worked table, and practice question below against the current CFP® Certification blueprint.
How is IRC § 2703 tested on the CFP® Certification?
Every business-succession question on the CFP exam follows the same underlying structure. Use this 5-step decision framework and you'll rarely miss one: Think of a Cross-Purchase agreement as creating a 'criss-cross' of life insurance policies. Every owner has a policy on every other owner, creating a web of criss-crossing obligations. This visual helps remember the complexity and the N * (N - 1) formula.
Where can I practice CFP® Certification questions on Business Succession Planning: Buy-Sells, Valuation, and Family Transfers?
Test yourself instantly with the free playable CFP® Certification question on this page, or launch VoraPrep's full CFP® Certification adaptive question bank, interactive lessons, and 1:1 exam simulator at voraprep.com/cfp.