Page 27 - BusinessWest September 2, 2024

A New Wrinkle from the Supreme Court
Life Insurance, Stock Redemption, and Your Business
BY BENJAMIN M. COYLE, ESQ. AND ISABELLE FERGUS
Arecent Supreme Court case ruling may have you making some important changes to life-insurance policies owned by your company. In early June, the Supreme Court unanimously ruled that proceeds from life-insurance policies used to buy out a deceased owner’s shares of a business are not offset by redemption obligations, which effectively results in the value of the company being increased.
In Connelly v. United States, the Supreme Court affirmed the lower court’s rul- ing that the obligation of the company to redeem shares at fair market value does not offset the value of life-insurance proceeds and that life-insurance proceeds must be included in the company’s valuation. The decedent’s estate argued that this decision made by the court will make succession planning increasingly diffi- cult for closely held corporations, and he is right.
In summary, Thomas Connelly, as executor of the estate of Michael P. Connelly Sr., sued the U.S. for a refund of the estate taxes assessed against Michael Con- nelly’s estate. Michael and Thomas Connelly owned a building-supply corporation known as Crown C Supply (“Crown”). Michael owned a 77.18% stake in the com- pany, while Thomas owned the rest. The brothers had a buy-sell agreement that required the company to be valued as of the date of death of a shareholder.
Crown purchased a $3.5 million life-insurance policy on each brother’s life. The life insurance was to be used by Crown to buy the deceased brother’s shares if the other brother did not want to buy the shares personally. Thomas determined that he did not want to buy Michael’s shares, and therefore Crown was obligated to do so. This is where the valuation of Crown comes into play.
Thomas argues that Crown was worth $3.86 million before the redemption, and Michael’s shares were worth $3 million. He also claims that Crown was worth $3.86 million after Michael’s shares were redeemed. In the court’s eyes, both of Thomas’s claims cannot be true.
“The question here is whether Crown’s contractual obligation to redeem Michael’s shares at fair market value off- sets the value of life-insurance proceeds committed to funding the redemption. The answer is no.”
BENJAMIN COYLE
In granting summary judgment to the IRS, the lower court reasoned that it found that the stock-purchase agreement did not affect the valuation and, further- more, that a proper valuation of Crown must include the life-insurance proceeds that were used toward redemption because it is seen as significant asset of the company, making Crown not worth $3.86 million, but $6.86 million.
The question here is whether Crown’s contractual obligation to redeem Michael’s shares at fair market value offsets the value of life-insurance proceeds committed to funding the redemption. The answer is no. The Supreme Court affirms that Crown’s contractual obligation to redeem Michael’s shares did not diminish the value of those shares because redemption obligations are not seen as liabilities that reduce a corporation’s value for federal estate tax.
Impact of the Ruling
So, how does this recent decision
Insurance
Continued on page 28
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