Earlier this year the United States Supreme Court issued its opinion regarding Connelly, as Executor of the Estate of Connelly v. United States which held that the value of life insurance proceeds used to redeem the shares of a deceased shareholder must be included when calculating the value of those shares for purposes of the federal estate tax.
Specifically, the court did not believe that the contractual redemption obligation constituted a liability that would offset the insurance proceeds received as a result of a deceased shareholder.
This decision will directly impact all family and closely held business owners that have company owned life insurance intended to fund share redemptions upon an owner’s death. Business owners should reach out to their attorneys to review the current buy-sell agreements and discuss whether to restructure the life insurance. Options include:
- Cross-purchase Agreements – theseallow each shareholder to own a life insurance policy on each of the other shareholders, the proceeds of which are used to purchase the deceased shareholder’s interest from their estate. This has tax benefits but can be difficult if there are several owners.
- Special Purpose LLCs – these areowned by the shareholders and can be used to hold life insurance. If the company has several owners, this is simpler than a cross-purchase, but it must be structured carefully in light of the Connelly decision.
- Insurance Trusts – these are available to hold life insurance and have it removed from the gross estate for federal estate tax purposes.
The choice of life insurance arrangement will depend on the value of the gross estate for federal estate taxes, the number of owners and the intended recipients of the proceeds. If you have questions about this ruling or how it affects your current succession planning, reach out to your Warner attorney or Jennifer Remondino.
