The U.S. Supreme Court in Connelly v. United States held that the value of a company, for estate tax purposes, is increased by the proceeds that the company receives from a life insurance policy which are used to redeem (purchase) an owner’s interest in the company. In this case, the company received proceeds from a life insurance policy insuring the life of one of the company’s shareholders and was required to redeem the deceased shareholder’s stock in accordance with a buy-sell agreement. The estate of the deceased shareholder argued that the company’s value (included in the estate for estate tax purposes) should not include the amount of the life insurance proceeds because the company’s obligation to redeem the deceased shareholder’s shares offset this amount. The U.S. Supreme Court ruled that the life insurance proceeds used to redeem the deceased shareholder’s shares were not offset by the redemption obligation.
In light of this U.S. Supreme Court decision, businesses and their owners should review their buy-sell agreement (which may be part of a shareholders agreement, operating agreement, or partnership agreement, depending on the type of business) and in the event that the buy-sell agreement includes a redemption obligation funded by life insurance proceeds, the business and its owners may want to consider modifying the buy-sell agreement.
If you need legal assistance with reviewing or modifying a buy-sell agreement, please contact Theodore F. Claypoole at (610) 692-1371 or tclaypoole@utbf.com.
