Life Insurance Proceeds Could Inadvertently Increase the Value of your Business and Increase Estate Tax

Most businesses have some form of agreement and financing in place to address an unexpected change in ownership.? In Connelly v. United States, the Supreme Court may have disrupted succession planning for closely held businesses.? Here is a summary of the key points and the Court’s suggestions.

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• The Connelly brothers owned a family business and entered into a buy-back agreement that addressed the death of a shareholder.? Life insurance was purchased by the Company to ensure there would be enough funds to redeem the shares.
• Upon the passing of one brother, the Company paid the decedent’s estate from the insurance proceeds.? The estate filed a federal estate tax return, reporting the value of Company shares based on the redemption amount paid.
• The IRS audited the return and valued the Company including the life insurance proceeds and assessed additional tax.? The family argued in district court, appealed to the Eighth Circuit Court, before arriving at the Supreme Court.? Courts found in favor of the government and upheld the assessment of additional tax.
• The Supreme Court determined the company obligation to repurchase shared did not offset life insurance proceeds, thus increasing the business value (FMV + Life Ins Proceeds). ?The Court did however suggest alternatives for dealing with the death of a shareholder that would not impact the value of a business.? The Court suggested a cross-purchase agreement where the shareholders are obligated to purchase shares of a deceased owner using life insurance purchased outside of the company, avoiding the risk of having life insurance proceeds increasing share value.?

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