Supreme Court Ruling in Connelly v. United States
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Supreme Court Ruling in Connelly v. United States

Wealth Management


Buy-Sells May Now Lead to Estate Tax Liability

Supreme Court Ruling Summary

On June 6, 2024, the Supreme Court ruled that the IRS can include life insurance proceeds used for redemption obligations when calculating estate taxes. This decision overturns the previous understanding that these proceeds were considered a liability offset. As a result, this ruling significantly impacts how closely held businesses should structure their buy-sell agreements.

Case Background

Crown C Supply Inc. was owned by two brothers, Michael P. Connelly Sr. and Thomas A. Connelly. Michael held a 77.18% majority stake, while Thomas owned the remaining 22.82%. They had a buy-sell agreement stipulating that the business would redeem their shares upon an owner’s death unless another shareholder wished to purchase them first. When Michael passed away, the company received a $3.5 million life insurance benefit and agreed to a $3 million redemption price for his shares. The IRS, however, included the insurance proceeds in the business’s value, raising it from $3.86 million to $6.86 million.

IRS and Court Decisions

The IRS’s position was that the life insurance proceeds should be included in the business’s value, significantly increasing the estate tax. The court agreed, leading to an additional $889,914 tax liability for Michael’s estate. The court concluded that a corporation’s obligation to redeem shares does not necessarily reduce its value for estate tax purposes. This decision shifted the perspective on how life insurance proceeds are factored into the valuation of a business.

Key Takeaways

The ruling highlights the importance of clearly defining the value of a business in buy-sell agreements. The court emphasized that life insurance proceeds should be included in the business’s fair market value. This decision complicates succession planning for closely held businesses, making it crucial to reassess and possibly restructure buy-sell agreements to mitigate potential tax liabilities.

Actionable Advice

In light of this ruling, it is essential to review and possibly revise existing buy-sell agreements to ensure they clearly define the business’s value and account for potential tax implications. It is also important to reassess life insurance planning, considering how proceeds are used and factored into estate valuations. Exploring alternatives like cross-purchase agreements could help mitigate potential tax liabilities and provide more effective succession planning strategies. Understanding and adapting to these changes will help businesses better manage their estate planning and minimize tax burdens.

If you have questions about the ruling, Yeo & Yeo is here to assist you. Our team of tax, business valuation, and financial planning professionals is uniquely equipped to guide you through these complexities and help minimize your tax liability. your business’s future. Contact us to learn more.

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