The recent Supreme Court case, United States v. Connelly, has significant implications for businesses and their estate tax planning. The Court ruled that life insurance proceeds held by a company must be included in its valuation for estate tax purposes, even if those proceeds are earmarked for a stock redemption.
Imagine it this way: You have a house, and you have homeowner’s insurance that covers the replacement cost of the house. A similar ruling by the court would say the value of that insurance policy itself adds to the overall value of your house for tax purposes, even though it’s there to protect you, not increase your property value. We can all be relieved this is not currently true.
This ruling, however, is a game-changer for businesses. It means that life insurance policies held by a company are no longer considered “off the books” when it comes to taxes. So, businesses need to get creative to avoid a hefty tax bill down the road. It’s super important for owners and their advisors to review their buy-sell agreements and estate plans to make sure they’re still set up to minimize tax liabilities.
The good news? There are ways to work around this.
- Different insurance setups: Instead of the company holding the insurance, owners can buy policies on each other, which can keep those payouts out of the company’s valuation.
- Trusts: Putting insurance policies in a trust can also help keep them separate from the company’s assets.
Read More in Greg’s article for NACVA QuickRead: Valuation Lessons from Connelly v. United States