The recent Supreme Court decision in Connelly v. United States has brought to light important considerations for businesses with company-owned life insurance policies. The unanimous 9-to-0 ruling has significant implications for estate tax purposes and the valuation of a company’s shares upon the death of a shareholder. This decision may not directly affect businesses where only shareholders own life insurance on each other’s lives, but it is crucial for companies with company-owned life insurance to understand the potential impact.
The key takeaway from the Connelly decision is that the life insurance death benefit paid to a company is now considered an asset of the company for valuation purposes. This means that the value of a deceased shareholder’s shares may be higher for estate tax purposes, potentially leading to discrepancies between the amount received by the deceased shareholder’s family and the estate tax value of the purchased shares. While buy-sell agreements are still valid and enforceable, the decision underscores the importance of reviewing and updating these agreements to ensure they align with current intentions and regulations.
For businesses with company-owned life insurance and shareholders who may be subject to estate taxes, it is essential to consider restructuring insurance ownership to mitigate potential tax implications. Options for structuring insurance ownership include not funding redemption agreements with company-owned life insurance, using a cross-purchase type agreement where each shareholder owns life insurance policies on the other shareholders, or setting up an LLC to own the life insurance policies.
However, any changes to the ownership of life insurance policies should be carefully planned to avoid income tax and estate hazards. Transferring life insurance policies from an S corporation to shareholders or owning life insurance through an LLC can have tax implications that need to be addressed. Additionally, practical issues such as funding premiums, keeping the death benefit out of owners‘ estates, and ensuring the policies remain in force must be considered when transitioning to a new buy-sell structure.
It is advisable to seek guidance from an attorney well-versed in buy-sell agreements and tax implications when making changes to insurance ownership. Consulting with legal experts can help navigate the complexities of restructuring insurance ownership and ensure compliance with relevant laws and regulations.
In conclusion, the Connelly decision has highlighted the importance of understanding the implications of company-owned life insurance on estate tax valuations and shareholder agreements. Businesses with company-owned life insurance policies should carefully review their current arrangements and consider restructuring insurance ownership to align with their goals and minimize tax liabilities. For more information on the impacts of the Connelly decision, it is recommended to contact legal professionals familiar with these issues for personalized guidance and support.