Recent Supreme Court Case Impacts Business Succession Plans

It's advisable for business owners to have a buy-sell agreement that outlines the procedures and terms for buying and selling  their business interests under various circumstances.  Buy-sell agreements serve as a crucial tool for managing transitions in ownership, ensuring business continuity, and protecting the interests of all parties involved.  One such triggering event for a buy-sell agreement is the death of a business owner, in which case life insurance is typically used to fund a buy-out of the deceased owners family, allowing the family to recognize the economic value of the business and the surviving business owners/successors to continue business operations.   For a better understanding of buy-sell agreements click here.

In a recent ruling by the U.S. Supreme Court in the case of Connelly v. Internal Revenue Service, the court ruled that life insurance proceeds paid to a business as part of an entity-purchase buy-sell agreement increase the business's value for the purposes of determining the taxable estate of the deceased owner.  This is potentially meaningful to the deceased business owners heirs if the deceased's estate is already, or if it causes the estate to be, subject to the Federal estate tax.   

Compounding the impact of this ruling is the fact that the Federal estate threshold, currently $13.61 million, is scheduled to be reduced by 50% when the Tax Cuts & Jobs Act expires after 2025.  So after 2025, if an individual passing away with a taxable estate of over ~$7M (~$14M for married couples) will be subject to an estate tax with a top rate of 40%.   For more on the upcoming tax changes click here.

What to do

If you are a business owner you should have already started assessing and projecting the value of your taxable estate due to the upcoming tax changes; however in the wake of the Connelly case you will now also want to review your buy-sell agreement.  

When reviewing a buy-sell agreement we suggest that you lean on advisors not compensated by the sale of an insurance product to get truly unbiased guidance.