Estate & Trust Director
Do you have a buy-sell agreement with your business partner(s) and the company owns life insurance on each of you so the remaining partner(s) will have the cash to purchase your share from your estate? If so, you will want to know about a recent Supreme Court decision that sides with the IRS stating that the life insurance payout could increase your estate.
Here’s what happened:
Connelly v. United States No. 23-146 (June 6, 2024)
Two brothers who ran a family business entered into a buy-sell arrangement that gave the surviving brother the option to purchase the deceased brother’s share of the company. The company purchased life insurance policies on each brother in order to fund the purchase. In this case, the surviving brother declined to purchase the shares, so pursuant to the agreement, the company was required to redeem the stock from the estate at fair market value based on an independent appraisal.
In valuing the corporation for estate tax purposes, the estate took the position that the life insurance payout ($3 million) was an asset of the corporation, but the contractual obligation to redeem the deceased brother’s shares ($3 million) was a liability of the corporation. In effect cancelling each other out. The IRS agreed that the life insurance proceeds were an asset but disagreed that the redemption obligation was a liability.
The Supreme Court agreed with the IRS and increased the value of the estate by the $3 million.
Planning Ahead
Wright Ford Young & Co. can help evaluate your buy-sell agreement to see if this applies and present alternatives to avoid this situation. If you don’t have a buy-sell agreement or an estate plan for your business, we can discuss what is right for you. To learn more about this topic, please contact your WFY advisor here. You can also sign-up for our newsletter here to receive more updates.
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