Business Owner Alert: A Supreme Court Decision Could Affect Your Estate Tax Obligation

On June 6, 2024, the United States Supreme Court issued a ruling in Connelly v. United States, affecting the value of businesses that own life insurance policies payable on the death of a business owner. The court held that the death benefit received by the business is countable as a business asset, thereby increasing the value of the business and the deceased business owner’s estate. This decision brings a significant change for closely held business owners, affecting their ownership transition and estate tax obligations upon death. 

How does this change affect business owners and their estate planning?

As part of their Buy-Sell Agreements, many businesses own life insurance policies for each business partner. On the death of a partner, the death benefit pays out to the company, which is then used to redeem the deceased owner’s shares from his or her estate. Because the company is valued for estate tax purposes on the partner’s date of death, the life insurance proceeds are includible as an asset of the business. When the business interest is reported on the deceased partner’s estate tax return, the business’s overall value must include the death benefit, which could increase the decedent’s estate tax liability. 

What steps should a business owner take?

In the wake of this decision, business owners should plan to review their buy-sell agreements and consider cross-purchase agreements as an alternative life insurance strategy. Cross-purchase agreements allow business partners (or trusts established for their benefit) to own life insurance on each other instead of the business owning the policies. This could mitigate the inclusion of the death benefit from the business valuation. 

In addition to reviewing the consequences of any existing or contemplated succession plans with their advisors, business owners should plan to meet with an experienced estate planning attorney to understand how this change will affect their asset picture and estate tax liabilities. By doing so, business owners can reanalyze their estate tax strategies and ensure the best outcome for their families. 

How can Mulhall Withrow help?

1. Evaluate Life Insurance Policies. We can evaluate the impact of any existing life insurance policies on your estate’s valuation and how it may impact your taxable estate. 
2. Assess Current Tax Thresholds and Liabilities. Upon gaining an understanding of your asset picture, we can advise you on tax planning that will help minimize estate tax liabilities and structure your estate plan in a way that provides asset protection. 
3. Plan for the Future of any Business Interests and Assets. We can structure your estate plan and asset distribution in a way that will ensure a smooth process to successor ownership and provide proactive solutions.

If you would like to review your current tax position relative to this new Supreme Court decision, contact our team today contact our office at info@MulhallWithrow.com or give us a call at (781) 381-5287 to schedule a consultation. With some further tax-minimization techniques as part of your estate plan, we can work to reduce your tax liability in the case of an increased business valuation. For business owners with existing estate plans, this is an excellent time to review your documents to learn more about how this change will affect your family and whether you should consider any updates.