Focus on Business Succession Planning in Light of the Connelly v. US Case

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Buy-Sell Planning after Connelly What Businesses Need to Know

 

In June 2024, the US Supreme Court ruled that life-insurance proceeds earmarked by a corporation for redemption of a deceased shareholders’ stock must be included when valuing the corporation for estate-tax-purposes. Fair market value redemption obligation does not offset the value of life insurance proceeds earmarked for the redemption because redemption does not affect any shareholder’s economic interest. This can be seen as a blow for closely held business succession planning and denies estates a potentially significant tax benefit.

In Connelly v. U.S. No 21-3683, two brothers owned a company that had a stock redemption plan funded by life insurance policies on the brothers. Their stock redemption agreement provided that the brothers would annually agree on a valuation of their company during their lifetime and provided a method of valuing the company at death. During their lives the brothers ignored the valuation provisions and even after the first brother died. The court found that the company didn’t set a fixed price for federal tax purposes pursuant to Internal Revenue Code Section 2703. The court also held that the value of the business included the proceeds from the policy insuring the life of the deceased owner.

This case is a reminder that any buy-sell agreement isn’t always technically sound and will fall apart if it isn’t complied with. It underscores the need and opportunity for businesses to meet with advisors to review current redemption arrangements. Business owners should work with their legal team to consider the economic and estate tax implications of various approaches to structuring and funding buy-sell agreements as well as risks associated with each.

With Anthony J. Madonia & Associates, you can discuss such options as a “trusteed” or “escrowed” buy-sell or the use of a special purposed insurance limited liability company that’s owned by the insured. We have a team of professionals skilled in business law and corporate counsel. Contact us to set up an appointment or ask questions.