On June 6th, a little-known court ruling reshaped buy-sell agreements between business partners. Connelly v. United States involved two brothers, a business transition, and a valuation dispute.
The Supreme Court ultimately ruled that company-owned life insurance increases a company’s value for tax purposes.
Life insurance is a common funding tool in buy-sell agreements. When a partner dies, the surviving partner(s) use the death benefit proceeds to buy out the decedent’s estate. The policies can be owned by the partners (“Cross-Purchase”) or the company itself (“Stock Redemption”).
The Court targeted the latter arrangement, stating that proceeds from company-owned life insurance should be reflected in the business’ estate tax value. This inflates business value and leads to a larger estate tax bill for heirs.
Existing buy-sell agreements funded with company-owned life insurance risk a similar fate. Fortunately, dependable planning alternatives exist. Business owners should review existing or prospective buy-sell agreements with a trusted advisor for further guidance.
Financial Advisor
Baldwin & Clarke Advisory Services, LLC
Email: bryce@baldwinclarke.com
#buysellagreements #estateplanning #businessvaluation #lifeinsurance #taxlaw
