By: Jon Dannemiller, Senior Consultant of Executive Benefits of Marsh McClennan Agency
In Connelly v. United States (June 2024), the Supreme Court unanimously 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.
What This Means
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.
What To Do
- 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, your tax advisor, and insurance professional 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, using irrevocable life insurance trusts (ILITs), or creating an insurance LLC to own the policies instead of the corporation directly.
- Regular Insurance Policy Reviews: Regularly review your life insurance policies. Making sure your insurance policies are performing as anticipated, as well as making sure they dove-tail with your business succession and estate planning is crucial.
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.
Learn More
Contact Jon Dannemiller, Senior Consultant of Executive Benefits at Jon.Dannemiller@MarshMMA.com or 919.788.7176 for more information or executive benefit solutions to bring to your company.
Material posted on this website is for informational purposes only and does not constitute a legal opinion or medical advice. Contact your legal representative or medical professional for information specific to your legal or medical needs.
