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The U.S. Supreme Court Has Just Changed Buy-Sell Agreements For Years to Come: Will Your Company and its Owners be Impacted?

July 2, 2024

In a unanimous ruling, the U.S. Supreme Court just made a significant decision that will impact the structuring of buy-sell agreements for closely held companies. These are commonly used by business owners to ensure that, when one owner dies, their interest will be sold to the other owners or to the company. Life Insurance typically funds these agreements.

In Connelly v. United States, the IRS challenged the valuation of a closely held business for estate tax purposes. Crown C Company was a building materials company owned by Michael Connelly (77% ownership) and Thomas Connelly (23% ownership).

Crown C purchased $3.5 million of life insurance on each brother. When Michael died, $500,000 of the death benefit was used to fund ongoing operations of the business. The remaining $3 million was used to redeem Michael’s shares.

The IRS challenged the $3.89 million business valuation and argued that the value should include the $3 million of life insurance proceeds that were used to fund the buy-sell agreement, resulting in a total valuation of $6.89 million for estate tax purposes. This decision ultimately resulted in nearly $1 million in additional estate taxes to Michael’s family.

This ruling will set the precedent for how buy-sell agreements are structured and redeemed when the time comes. Closely held corporations who own life insurance for buy-sell/ stock redemption purposes should review their plan and the underlying policies.

The experienced team at Oswald can evaluate your current agreements and insurance to determine if you are covered when an owner of the company dies.

Contact me below to determine what coverage you will need to ensure fair payments and avoid disruption of your business.

Life Insurance