Supreme Court Unanimously Includes Life Insurance Proceeds Intended for Redemption of a Shareholder in the Value of the Corporation in the Estate

The U.S. Supreme Court ruled unanimously on June 6, 2024, that “[a] corporation’s contractual obligation to redeem shares is not necessarily a liability that reduces a corporation’s value for purposes of the federal estate tax.” In this already famous (to estate and BV professionals) Connelly1 case, the Supreme Court’s decision will likely change dramatically the way redemption life insurance is structured in estate plans.

The gist of the decision is that the $3.0 million of insurance proceeds paid to the corporation, used to redeem the deceased 77.18% shareholder’s shares, is added to the otherwise determined $3.86 million fair market value (FMV) of the corporation for a total FMV of $6.86 million. The court determined that a hypothetical buyer would pay  $5.3 million (77.18% × $6.86 million). This  assumes that there is no reduction in the FMV for the obligation to pay the estate $3 million to redeem the stock. The $5.3 million assumes that the obligation of the corporation to pay $3 million to redeem the shares would be an asset to the buyer, i.e., the buyer would also obtain the rights to the $3 million redemption and get to keep the stock.

This case results in some computations by both sides that differ and the decision the Supreme Court reached simply results in the IRS side being the winner. Despite the questionable logic, the result is what it is and estate planners will likely switch to the use of cross-purchase agreements to avoid this issue.

A case analysis and full court opinion will soon be added to the the BVLaw platform.

Thomas A. Connelly, as Executor of the Estate of Michael P. Connelly, Sr., Petitioner v. United States on Writ of Certiorari to the United States Court of Appeals for the 8th Circuit (June 6, 2024).