Advantages and Disadvantages of Section 303 

A Section 303 stock redemption agreement offers a number of advantages to the shareholder's heirs:

• The business ownership may remain in the family in a family-owned corporation.
• Heirs are assured that funds are available to help pay estate settlement costs.
• Corporate dollars can be used to make a tax-favored partial redemption.
• Income taxes on the sale can be minimized or eliminated.

One of the disadvantages of a 303 redemption is that—like any other redemption—it can alter the ownership percentages of the surviving shareholders.

There is no "needs test" for 303. The estate can take full advantage of Section 303 even though there may be other cash available to the estate.

Further, the IRS does not attempt to trace the redemption cash to see whether it was actually used for death taxes and costs. The estate or heir may not want to pass up the opportunity to get cash out of the corporation tax-free even if the cash is not needed for liquidity.

A 303 redemption may not be useful for the estate of a married business owner whose estate plan optimizes the use of the unified estate tax credit and the marital deduction, since there will be no federal estate tax to pay at the owner's death. A 303 redemption generally will be more useful when there is no surviving spouse.

If a shareholder's assets other than the stock are so significant that the 35% test may not be met at death, the shareholder may wish to consider making lifetime gifts of these other assets to improve the estate's chances of meeting the 35% test.