High Court Ruling Reveals Lesson Learned on Life Insurance in Succession Planning

A recent ruling from the U.S. Supreme Court (Connelly v. United States, U.S., No. 23-146, 6/6/24) stated that the value of a family company, Crown C Supply Co., must include the life insurance payment made to the company even though the payment was used to redeem the shares of the deceased shareholder. The inclusion of the life insurance in the valuation caused the company shares to increase pushing the valuation beyond the $13.6 million estate exemption threshold, incurring a 40 percent tax.

The ruling sets a precedent that could impact many business owners that utilize a similar buy-sell redemption strategy, and especially those without access to skilled professional expertise and a well-thought-out succession plan.

Plan more to avoid taxes

The Court stated there were other succession plan options for the Connellys to consider if they wanted to avoid the steep estate tax. Industry pundits have weighed in saying the ruling was obvious, and the particular buy-sell agreement used by Crown C Supply Co. was not advisable. Business owners should use this ruling as a reminder to review or when implementing their succession planning strategy.

If life insurance is to be used as part of your succession planning, then you must prepare accordingly to minimize the impact of any potential estate taxes. A savvy succession planner would identify inherit risks associated with the strategy and factor it into their strategy.

Broader repercussions for business owners

The Connelly case should be a lesson and a warning for those that are near the estate exemption threshold that additional planning and guidance could help save millions in future estate taxes. Buy-sell agreements need to be reviewed to determine whether other arrangements, such as a cross-purchase agreement, would be more tax-advantageous. Succession planning strategies should be reviewed to make sure that other business priorities were not placed ahead of estate tax implications which as we have seen in the Connelly case can be extremely costly.

06/12/2024