How the Supreme Courtâ€™s Decision Regarding Life Insurance Proceeds Changes the Federal Estate Tax Landscape

7/26/2024 - By Julie Edwards, CPA

On June 6, in Connelly v. United States, the Supreme Court ruled that the valuation of a closely held company for federal estate tax purposes must include life insurance proceeds received by the company used to redeem a deceased shareholder’s stock. This unanimous opinion has considerable implications for federal estate tax calculations and has the unfortunate potential of increasing an estate’s overall tax burden. This shift in how life insurance proceeds are treated will significantly affect corporations and their shareholders.

Implications of the Court’s Decision

The Supreme Court concluded if a corporation receives life insurance proceeds to buy back shares from a deceased shareholder’s estate, those proceeds are considered part of the decedent’s taxable estate. The proceeds are then utilized to calculate the fair market value of the units/shares/stock owned by the deceased in a closely held entity. In turn, these funds will be subject to federal estate taxes. This is mandated even if the company has a contractual obligation to use those proceeds to redeem stock from a deceased owner.

Implications for Business Owners

Business owners should reassess their buy-sell agreements and life insurance policies in light of this new ruling. The inclusion of life insurance proceeds in the company’s valuation could lead to higher estate taxes. Estates that include corporate-owned life insurance proceeds should seek advice regarding how to mitigate any potential increase in tax liabilities. It will be essential for estate planners to stay informed about this ruling to effectively reevaluate current estate planning techniques. New strategies involving alternative methods for funding stock redemptions or succession planning will need to be leveraged to avoid the increase in the overall tax liability.

Conclusion

Ensuring compliance with the new requirements will be essential to avoid unexpected tax liabilities. Business owners and estate planners must take proactive steps to understand and adjust to this new interpretation of the law.

Questions?

Saltmarsh, Cleveland, & Gund can provide expert advice and support to any client affected by this new ruling. Please don’t hesitate to reach out and schedule a call with one of our estate tax team experts.

About the Author | Julie Edwards, CPA

Julie is a senior in the Tax & Accounting Services practice of Saltmarsh, Cleaveland & Gund. She works with a wide range of industries, including construction, manufacturing and high net worth individuals. She began her tax career in 2016 as a staff accountant and also worked as a senior accountant for a Georgia-based firm.