
A new Supreme Court ruling (Connelly v. United States) has added complexity for our Geyer Law clients who are owners of closely held businesses.
The ruling relates to life insurance coverage business partners use. True, at Geyer Law, we do not sell life insurance, instead working with each client’s insurance and tax advisors to formulate plans. However, we do have many business owner clients and are therefore interested in coordinating the estate planning with their business interests.
A buy-sell is a legal arrangement in which either the entity or the business owners agree to buy out the equity of a deceased owner. Until now, in order for the policy proceeds to avoid being part of the taxable estate of an owner who has died, the solution has been to arrange for the proceeds to be paid into a life insurance trust for the benefit of the spouse and other heirs. The insurance proceeds have been considered to pass outside the estate.
https://www.rgeyerlaw.com/blog/2021/12/life-insurance-an-estate-planning-swiss-army-knife/
In the Connelly v. United States case, one key question was whether life insurance proceeds need to be included in calculating the value of the company upon the death of one of the owners. The ruling was that, yes, the life insurance proceeds used to redeem shares must be included in determining the fair market value of the company. In addition, the Supreme Court found that a closely held corporation’s contractual obligation to redeem shares upon an owner’s death is not a liability that reduces a corporation’s value for purposes of the federal estate tax.
In some cases, having life insurance proceeds included in the value of an estate will expose the estate to increased estate taxes. But even where this does not prove the case, the Connelly ruling serves as a caution to business owners to review their estate and business documents along with their life insurance agreements to avoid unintended difficulties and tax liabilities when a partner has died..
– by Rebecca W. Geyer