Urgent: Supreme Court Ruling Impacts Buy-Sell Agreements

From Paul Pichie, Director of Advanced Markets for BackNine Insurance

As a seasoned professional in the insurance industry, I have witnessed numerous changes and developments that impact our field. One recent Supreme Court ruling, in particular, calls for immediate attention and action from all insurance agents working with business clients.

Supreme Court Ruling: Connelly v. United States

The U.S. Supreme Court recently delivered a unanimous decision in the case of Connelly v. United States, which has profound implications for buy-sell agreements funded by life insurance policies. The Court ruled that life insurance proceeds used by a corporation to redeem a deceased shareholder’s stock must be included in the corporation’s value for federal estate tax purposes. This means that the proceeds from such policies are considered a net asset, increasing the corporation’s fair market value and potentially leading to higher estate tax liabilities【1】【2】

Key Points of the Ruling:

• Life insurance proceeds are treated as corporate assets【2】
• Redemption obligations do not offset the value of these proceeds【3】
• Closely held businesses must reassess their succession planning strategies to avoid unforeseen tax burdens【4】.

Why This Matters to Your Clients:

Many of your business clients may have established buy-sell agreements with the intention of ensuring smooth ownership transitions and providing liquidity to pay for shares upon a shareholder’s death. However, the Supreme Court’s decision means that these well-intentioned plans might inadvertently increase the estate tax liability, impacting the overall financial stability of the business and the heirs【2】【3】.

Action Steps for Agents:

1. Review Existing Buy-Sell Agreements:

• Schedule meetings with your business clients to review their current buy-sell agreements.
• Ensure that they understand the new tax implications of life insurance-funded buyouts【2】【4】.

2. Consider Alternative Strategies:

• Explore other succession planning options, such as cross-purchase agreements, which might offer better tax treatment under the new ruling【4】【5】.
• Discuss potential restructuring of existing agreements to mitigate the tax impact【3】【4】.

3. Educate and Inform:

• Utilizing BackNine as a resource, prepare detailed explanations and scenarios to help your clients grasp the importance of revisiting their plans.
• Use specific references from the Supreme Court ruling and expert analyses to back up your recommendations【1】【3】【4】.

Sample Letter for Your Clients:

To assist you in communicating these critical changes to your clients, we have prepared a sample letter that you can use as a template which you can download here.

Let’s work together to turn this challenge into an opportunity for better, more informed planning. Reach out to your clients today and schedule a review of their buy-sell agreements to secure their financial future.

Paul Pichie

Director of Advanced Markets, BackNine Insurance

Email: [email protected] // Phone: 805.358.6264

References:

1. ThinkAdvisor, “Supreme Court Rules Against Estate in Business Buy-Sell Case,” June 2024.
2. Gibson Dunn, “Supreme Court Holds That A Corporation’s Life Insurance Proceeds Used To Redeem A Decedent’s Shares Must Be Included In Federal Estate Tax Calculation,” June 2024.
3. Journal of Accountancy, “Impact of Supreme Court Ruling on Buy-Sell Agreements,” June 2024.
4. National Law Review, “Estate Planning After Connelly v. United States,” June 2024.
5. Forbes, “How the Supreme Court’s Decision Affects Small Business Succession Planning,” June 2024.