Implications of Connelly v. United States
Closely held and family businesses are the backbone of our economy, and navigating their unique challenges requires strategic foresight. The recent Connelly v. United States decision introduces unexpected tax risks that could significantly impact buy-sell agreements funded by life insurance, creating implications that business owners may not see coming. Our experts break down what this means and why proactive planning is key. Watch to learn more, then connect with a Texas Capital Private Bank advisor in your area to explore strategies to safeguard your business’ future.
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The U.S. Supreme Court recently announced a decision that could severely impact a company's succession plan, funding and taxation.
In Connelly versus the United States, the Supreme Court ruled that life insurance proceeds used to buy out a deceased shareholder's shares in a corporation must be included in the company's fair market value for estate tax purposes. This decision was unanimous and changes how we need to address succession planning.
The concerning part of the Supreme Court's decision is that it can instantly increase the fair market value of a company upon the death of an owner. As you can imagine, instantly increasing the fair market value of the company may exfluncticate otherwise well-documented succession plans.
Josh, if you and I were partners in a business that was worth, say, $100 million, and we funded our buy sell agreement with $50 million life insurance on each of us, when one of us dies and the policy pays out, now would the business be worth $150 million?
That's correct. This could create a few issues. First, your heirs may now request the half of the value of the new business' worth, or $75 million. This could create a problem if there is not enough liquidity. Additionally, would I want to give them $75 million when I know the real business value of your share is $50 million? This, along with the impact of the new value may have on your estate taxes, could be devastating for your heirs.
Closely held and family businesses are important to us here at Texas Capital. We think this is an opportunity to bring unique insight and awareness to an unexpected and overlooked problem. While this issue is currently dormant, when triggered, the implications of Connelly can be a devastating shock.
If your company's buy sell agreement is currently funded with life insurance policies or if you are unsure, let's discuss how Texas Capital can help guide you through the implications of this recent court decision, and find strategic solutions to avoid this potentially devastating result.
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