In June 2024, a unanimous U.S. Supreme Court decided Connelly v. United States. For closely held companies that plan to buy back a deceased owner’s shares with company-owned insurance, it changed an important part of the math.
What happened
Two brothers owned a family building-supply company. Their agreement said that when one died, the company could buy back his shares, and the company owned insurance on each brother to pay for it. When one brother died, the company used the proceeds to buy his shares from his estate.
The estate argued that the insurance money shouldn’t increase the company’s value, because the company was obligated to spend it on the buyback. The IRS disagreed. The Supreme Court sided with the IRS: the obligation to redeem the shares is not a liability that cancels out the insurance proceeds when valuing the company for federal estate tax.
Why it matters to you
If your company owns coverage on you to fund a buyback of your shares, those proceeds may now increase the value of your shares for estate tax purposes. For owners whose estates may approach the federal exemption, that can mean more estate tax than expected, and less of the business’s value reaching the people you intended.
- Agreements written before 2024 were often designed under different assumptions.
- The way an agreement is structured (who owns the coverage, who buys the shares) now matters more.
- Alternatives exist, but each comes with its own trade-offs in cost, taxes and administration.
What to do
Don’t change anything on your own. Do bring your agreement and how it’s funded to your attorney and CPA for a review. Our role is to help identify whether your current arrangement should go back to them, and to model funding alternatives they can evaluate.