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Impact of Supreme Court Decision in Connelly v. United States on Buy-Sell Agreements

posted by TrueNorth Financial Strategies on Monday, July 29, 2024

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The recent Supreme Court decision in Connelly v. United States has significant implications for business owners with buy-sell agreements funded by life insurance. Understanding this ruling and its impact on your estate planning and tax strategy is crucial.

What the Court Decided:

In Connelly v. United States, the Supreme Court unanimously upheld the IRS’s position regarding the valuation of life insurance proceeds for estate tax purposes. The Court ruled that life insurance proceeds payable to a company to fund its obligation to redeem shares from a deceased shareholder must be included in the company’s fair market value when calculating the estate tax. This means that the proceeds increase the value of the decedent’s shares, thereby raising the estate tax liability.

Planning Affected:

The decision primarily affects closely held businesses with buy-sell agreements funded by life insurance. Traditionally, these agreements ensure that a deceased shareholder’s interest is bought out, allowing the business to remain within the remaining owners or family. The ruling emphasizes that the value of life insurance proceeds cannot be offset by the company’s obligation to redeem the shares, potentially increasing the estate tax burden.

Best Practices to Avoid Adverse Tax Consequences:

• Review and Update Buy-Sell Agreements: Given the new ruling, it is essential to review all buy-sell agreements and their funding mechanisms. Ensure they are structured in a way that minimizes estate tax liabilities. Consulting with an estate planning attorney and a tax advisor is crucial to navigating these complexities.
• Consider Alternative Structures: Explore alternative structures for buy-sell agreements that might be more tax-efficient. This could include cross-purchase agreements or using irrevocable life insurance trusts (ILITs) to own the policies instead of the corporation directly.
• Regular Insurance Policy Reviews: Regularly review your life insurance policies. Our experience shows that over 90% of the policies we review can be improved, whether due to changes in the insured’s health, the availability of new products, or shifts in the tax landscape.

The Supreme Court’s decision in Connelly v. United States highlights the importance of proactive planning and regular reviews of your buy-sell agreements and life insurance policies. This ruling is a reminder to ensure your succession planning strategies are robust and tax-efficient. Reach out to your advisors to discuss how this decision impacts your current arrangements and explore potential improvements.

By staying informed and proactive, you can mitigate the impact of this ruling and ensure your business is well-prepared for the future.

For any questions or to review your current buy-sell strategy and funding, please contact us. Our team is here to help you navigate these changes and optimize your planning to protect your business and its legacy.

(Securities offered through Lion Street Financial, LLC (LSF), Member FINRA & SIPC Investment Advisory Services offered through Lion Street Advisors, LLC. LSF is not affiliated with TrueNorth Companies, L. C.) Tax and Legal services are not offered by Lion Street Financial, LLC., or Lion Street Advisers, LLC.