Supreme Court case prompts estate tax considerations for businesses 

Owners of closely held businesses should review insurance-backed buy-sell agreements in light of Connelly case

The U.S. Supreme Court’s unanimous decision in Connelly v. United States on June 6, 2024, has significant estate tax implications for the valuation of closely held and family-owned businesses.

The Court ruled that, for estate tax purposes, life insurance proceeds payable to a business were includible in the value of the business, and the business’ contractual obligation to redeem the deceased owner’s estate did not create an offsetting liability. Accordingly, the life insurance proceeds increased the value of the decedent’s interest in the business and the estate tax owed.

For owners of closely held businesses, the Connelly case underscores the importance of properly structuring buy-sell agreements and carefully choosing the owner and beneficiary for life insurance. The case also may result in unintended consequences for businesses with existing buy-sell agreements.

To mitigate potential exposure to increased estate tax liabilities following the Connelly decision, owners of closely held and family-owned businesses should:

1. Review and possibly revise existing buy-sell agreements incorporating life insurance to confirm they align with the new legal landscape.
2. Consider alternatives to company-owned life insurance, including cross-purchase agreements whereby each of the business’ owners (or trusts) purchases an insurance policy on the lives of the other owners.
3. Engage in thorough estate planning with a focus on tax implications and valuation issues. Business owners may wish to increase life insurance coverage to offset the higher value of the company under Connelly.

The Connelly case serves as a reminder of the dynamic nature of estate tax law and the need for owners of closely held businesses and their advisors to stay informed and proactive in estate planning. By understanding the implications of this decision and taking appropriate action, owners of closely held businesses may better navigate the challenges and opportunities it presents. Further, these implications may be compounded by the scheduled sunset of the Tax Cuts and Jobs Act on December 31, 2025, which would lower the estate and gift tax exemption from nearly $14 million per individual today to approximately $7 million in 2026. Therefore, if your business is the beneficiary of a life insurance policy intended to fund a redemption upon an owner’s death, seek advice from a qualified tax professional.

The Kaufman Rossin Group has professionals specializing in estate and trust, insurance and business valuation. Contact us for guidance and assistance with the potential implications of this court case for your business.