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️Business Owners: New Court Ruling May Impact Buy-Sell Agreements in Estate Plans

By Preston Osbourn II, CPA, EPC, MST

December 18, 2024

Grimbleby Coleman’s Estates & Trusts team is shedding light on a June 2024 Supreme Court decision that may have implications for your business succession plan. Connelly v. United States centered around the valuation of a deceased shareholder’s interest in a closely held business for estate tax purposes. The Court ultimately held that life insurance proceeds earmarked for a share redemption are a net asset of the Corporation for estate tax purposes and that the resulting redemption obligations under the buy-sell agreement do not reduce share value, therefore significantly increasing the value of the company at the death of a shareholder.  

This case highlights an area many business owners should revisit immediately. By confirming that redemption obligations do not lower share values, the ruling establishes a precedent, which could impact estate planning for family-owned businesses and potentially influence family-business succession structures.  

Take a look at this case summary of the court ruling.

Read Case Summary & Strategy Guide

Ask yourself these questions: 

  • Do you have a buy-sell agreement in place?  
    • If so, it should be reviewed to determine whether this ruling impacts you. 
  • Are you one of a multi-owner business with NO buy-sell arrangement in place?  
    • If so, we encourage you to consider implementing strategies to avoid the potential negative consequences of this ruling. 

Analysis 

The Connelly ruling highlights the importance of meticulous estate and succession planning within closely-held corporations. In closing, the Court suggested that all disputes could have been avoided by eliminating the corporation as a party to stock buy-sell agreements. Thus, it is important to review and, if needed, adjust current estate planning and develop additional strategies for the use of corporate-owned life insurance to fund wealth transfers at death. Additionally, consider accurate estate tax valuations, cross-purchase agreements, and alternative planning strategies, such as irrevocable life insurance trusts (ILITs). 

Key Considerations for Estate Planning: 

  • Statutory Deadlines: Ensure all filings and valuations comply with deadlines to avoid legal issues. 
  • Life Insurance Valuation: Structure insurance ownership to mitigate increased estate taxes. 
  • Trust Utilization: Consider ILITs to exclude policy values from estates, reducing tax liabilities. 
  • Regular Plan Updates: Continually review estate plans to align with tax laws and financial changes. 

Grimbleby Coleman’s Wealth Management team, GC Wealth Advisors, may also be able to find opportunities to support you. Contact us with your questions. We can point you in the right direction to get a thorough review or funding of your buy-sell agreement.