The US Supreme Court’s decision in Connelly v. United States is prompting a reassessment for corporate business owners concerning their estate tax plans. The ruling impacts those relying on life insurance policies as a funding mechanism within buy-sell agreements for redeeming a decedent’s shares. With the inclusion of life insurance proceeds in the estate tax value, the decedent’s estate tax liability can significantly increase if the estate’s value exceeds the exemption amount.
The ruling’s broad implications extend beyond just corporations, potentially affecting other business entity types. Business owners must now meticulously review buy-sell agreements to ensure they can meet both owner succession goals and estate tax funding requirements. Factors such as financing, redemption obligations, and whether the business needs to liquidate assets for redemption are crucial points for consideration.
Given that the federal estate tax rate stands at 40% for amounts over the estate tax exemption amount—which is set at $13.61 million for 2024—planning is essential. The exemption amount, subject to annual inflation adjustments, also faces a reduction after the 2017 Tax Cuts and Jobs Act sunsets at the end of 2025. Adding complexity, various states impose their estate or inheritance taxes at lower thresholds and rates as high as 20%.
Businesses using life insurance for buy-sell agreements must now proactively structure their arrangements. Options include revising agreement terms for better liquidity, increasing life insurance coverage, and considering cross-purchase agreements where owners hold life insurance on one another. Engaging with tax and legal advisors will be critical in navigating these complex changes and ensuring business continuity and estate integrity amidst rising tax liabilities.
Firms should carefully evaluate their current buy-sell arrangements and explore alternative strategies, as highlighted in the detailed review by Bloomberg Tax.