On June 6, 2024, the United States Supreme Court issued its opinion regarding Connelly, as Executor of the Estate of Connelly v. United States. This final decision will directly impact all closely held business owners that have company owned life insurance intended to fund redemptions upon an owner’s death. Its reach may go even broader.

The Supreme Court Opinion on Connelly

The Supreme Court’s opinion held that life insurance proceeds used to redeem a deceased shareholder’s shares must be included when calculating the value of those shares for purposes of the federal estate tax. Specifically, the court did not believe that the contractual redemption obligation constituted a liability that would offset the insurance proceeds received as a result of a deceased shareholder.

What Should Closely Owned Business Shareholders Do After Connelly?

In wake of this decision, closely held business owners that have life insurance intended to fund buyouts should reach out to their attorneys to review the current buy-sell agreements and discuss whether to restructure the life insurance.

Other options exist for how to structure life insurance needed to buyout a deceased shareholder. Consider using an alternative arrangement such as:

• Cross-purchase Agreement: Each shareholder owns a life insurance policy on each of the shareholders, the proceeds of which are used to purchase the deceased shareholders interest from their estate. The buying shareholder receives a basis-step up for the shares purchased, but this arrangement can be difficult if there are a lot of owners.

• Special Purpose LLC: An LLC owned by the shareholders can be used to hold the life insurance. This is simpler than a cross-purchase but there may be some uncertainty on how the Connelly decision will impact the value of the LLC at the death of a shareholder.

• Insurance Trusts: An insurance trust is still available to hold life insurance and have it removed from the gross estate for federal estate tax purposes.

The choice that is made regarding how to structure life insurance will depend on the value of the gross estate for federal estate taxes, the number of owners and the intended recipients of the proceeds. If you have questions about this ruling or how it affects your current succession planning, reach out to your Warner attorney or Jennifer Remondino.

Summer Associate Madison Smith contributed to this article.