Beware of Company-Owned Life Insurance – Connelly v. United States | JD Supra

On June 6, 2024, the Supreme Court unanimously decided the case of Connelly v. United States, which concerned the valuation of a business with company-owned life insurance. In this case, two brothers were the sole shareholders of a company. The company had a buy-sell agreement that provided that when one brother died, the survivor could buy out his deceased brother’s interest in the company using company-owned life insurance. After one brother died, the survivor declined to purchase the shares, and the company redeemed them using the insurance proceeds. The deceased brother’s estate filed an estate tax return and reported the value of the shares at the redemption price. The value did not include most of the insurance proceeds, as those proceeds were offset by the cost of redeeming the shares.

On audit of the estate tax return, the IRS disagreed with the business valuation and argued that the value of the business interest should be increased by the amount of insurance, which essentially doubled the value of the business. The Court reasoned that the corporation’s obligation to redeem shares was not a liability that decreased the value of those shares. Note that is not entirely clear that the decision would remain the same for unrelated business owners.

In light of the Court’s decision, business owners should pay special attention to how company-owned life insurance may significantly increase the value of the company for estate tax purposes.

Read more about the Court’s decision here: https://www.supremecourt.gov/opinions/23pdf/23-146_i42j.pdf

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