BEWARE: Redemption Agreement Funded with Corporate-Owned Life Insurance

June 25, 2024 | Walter J. Gumersell | Joseph T. La Ferlita | Patricia C. Marcin | Lindsay M. Brocki | Trusts & Estates | Corporate | Tax

On June 6, 2024, in the case of Connelly v. United States, the United States Supreme Court determined that corporate-owned life insurance proceeds used to redeem a decedent’s shares in the corporation must be included when valuing those shares for federal estate tax purposes.

A decedent’s taxable estate includes the fair market value of shares that he or she owned in a closely held corporation as of the decedent’s date of death. The Connelly Court determined that the proceeds from a life insurance policy owned by the corporation and used to redeem such shares at the death of the shareholder should be included in calculating the value of the shares for estate tax purposes.

What does this decision mean for businesses? Owners of corporations, limited liability companies and partnerships should carefully review both their existing buy-sell agreements and estate plans, taking into consideration their current use of life insurance policies and its estate tax consequences.

Business owners should contact their professional advisors to determine the most tax-efficient way to transfer corporate ownership of life insurance policies to the business owners, individually. There could be significant income tax consequences if this transfer is not structured properly. In lieu of corporate redemption adjustments, consider creating cross-purchase agreements funded with life insurance on the business owners.

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