You may have seen or heard references to a recent United States Supreme Court case called Connelly v. United States. I’ve seen blurbs implying that the case invalidates buy-sell agreements or life insurance funding of buy-sell agreements.

Nothing could be further from the truth. All the court said is that the value of life insurance proceeds is counted toward valuing the company for estate tax purposes, and the company’s obligation to purchase those shares is not an offsetting liability. A significant decision by all means, but not one that invalidates life insurance funding.

A brief explanation:

When a person dies, if their estate is worth over $13,610,000, it’s subject to a 40% estate tax. If the deceased owned stock in a company, the value of that stock is counted toward the value of the estate. The more the company is worth, the more the stock is worth.

What the Supreme Court said in Connelly is that if the company held life insurance on the deceased, the proceeds of the life insurance are counted toward the value of the company, but the company’s obligation to buy the person’s shares is not counted as an offsetting liability.

So buy-sell agreements are still valid, and life insurance to fund buy-sell agreements is still valid. The issue is that in some situations, a buy-sell agreement funded by life insurance could trigger or increase the amount of estate tax that is paid.

Connelly only applies to cases where the estate of a deceased shareholder is so large as to trigger the estate tax. From now through 12/31/25, that amount is $13,610,000. Even though that amount will probably go down after 12/31/25, Connelly will still only apply to a small subset of buy-sell agreements.

Also, Connelly only applies where the company is obligated to purchase the shares (sometimes called a “redemption”). It does not apply where the other shareholder(s) are required to buy the shares (a “cross-purchase”). In that case it’s the shareholders who take out insurance on each other, so the insurance proceeds are not counted as an asset of the company in determining the value of the shares.

Therefore, high net worth business owners whose buy-sell agreement calls for the company to buy the shares should consult with their tax and estate planning advisors about switching to a cross-purchase arrangement where the other shareholders buy the shares. Let me know if you need an introduction or would like my help in working with your other advisors to design a solution.

Thanks,

Rick Randel

This post is not intended and should not be relied upon as legal or tax advice pertaining to any specific matter. You are encouraged to seek competent legal and tax counsel before proceeding with any transaction involving any of the matters discussed above.