Written By: Grady McMichen
Jun 28, 2024
Recently the Supreme Court unanimously held that the proceeds from life insurance policies taken out by shareholder's stock are a corporate asset for federal estate tax purposes. Michael and Thomas Connelly were the sole shareholders of a closely held business valued at $4 million. The Connelly's purchased a life insurance policy with the proceeds of the policy to be used to redeem the shares of the first brother to die.
When Michael died, the corporation used the life insurance proceeds to redeem his shares for $3 million. Michael's estate did not treat the life insurance proceeds as a corporate asset because the proceeds were offset by a corresponding liability to purchase Michael's shares. However, the IRS concluded that the $3 million life insurance proceeds were not offset by the liability to purchase Michael's shares, but rather should be included in corporation's valuation. This would bring the valuation of the corporation to $7 million and increases the value of Michael's estate.
What This Means:
This decision confirms that the IRS may tax life insurance policies as corporate assets, even if the proceeds will be used to redeem a decedent shareholder's shares.
This decision will have a tremendous impact on a widely used business practice for closely held companies to ensure ownership remains in the family upon the death of a shareholder.
In the Connelly decision, the Supreme Court indicated other options such as cross-purchase agreements are still available to accomplish the same purpose, although some other available solutions might have unwanted drawbacks.
Companies and individuals with estate plans should carefully review succession plans, including shareholder life insurance provisions and buy-sell agreements. Please reach out to a member of the Pease Bell team for assistance in light of this Supreme Court decision.
