By Matthew F. Erksine | Forbes
In a landmark decision on June 6, 2024, the Supreme Court has affirmed the lower Court’s decision upholding the IRS position on how life insurance proceeds and redemption obligations should be treated for federal estate tax purposes. The case, Connelly, As Executor of the Estate of Connelly v. United States[1], (602 US _____) involved the valuation of a small, family-owned business and has significant implications for business owners nationwide.
Case Overview
Michael and Thomas Connelly were the sole shareholders of Crown C Supply, a building supply corporation. To ensure the business stayed in the family if either brother passed away, they entered into a buy-sell agreement. This agreement allowed the surviving brother to buy the deceased brother’s shares. If the surviving brother declined, the corporation itself was required to redeem the shares using life insurance proceeds.
When Michael died, Thomas chose not to purchase the shares, triggering Crown’s obligation to redeem them using the $3 million life insurance proceeds. The estate reported the shares’ value at $3 million. However, the IRS valued the shares at $5.3 million, that is the value of the company plus $3 million, arguing the life insurance proceeds should be included in the corporation’s valuation, resulting in an additional estate tax liability of $889,914.
“Business owners must act now. If your company has a redemption agreement structure where upon the death of an owner, the company is funded by life insurance then, please review your agreement and consider making changes to avoid unintended tax consequences.” – Shruti Gurudanti, Rose Law Group partner and Corporate Transactions Director
