The Connelly v United States Supreme Court decision prompts financial professionals to review and modify buy-sell agreements for business succession planning.
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Author: Brenda Davis


When considering succession planning, many business owners often choose entity purchase agreements as a favored solution. Under this agreement, the business purchases the shares of a deceased owner upon their death, typically funded by a life insurance policy on each owner.

The ruling

In the recent case of Connelly v United States, the Supreme Court ruled that life insurance proceeds paid to a business inflate its fair-market value, but the business entity's obligation to redeem a shareholder does not reduce that value. As a result, for estate tax purposes, the deceased owner's interest is inflated by the life insurance proceeds received by the business, proportionate to their ownership percentage.

Highlights of the Supreme Court decision

  • Reliance on Estate of Blount v. Commissioner and Estate of Cartwright v. Commissioner is no longer an option. Going forward, dedicated life insurance proceeds cannot be excluded from the value of a deceased owner's estate.
  • Redemption does not impact a shareholder's economic interest. The obligation to purchase is not treated the same as a traditional liability (which would reduce the business value when calculating a deceased owner's interest).
  • In ancillary comments, the court also put into question the ability of any type of buy-sell agreement to establish the value of a business for federal estate tax purposes.

How can financial professionals mitigate ownership transfer risk?

If the estate (including the business) is below the basic exemption amount, a properly drawn and executed entity agreement could still be viable. Entity style plans have fulfilled the needs of many businesses by allowing fewer policies, better security and optimal cost distribution. For higher valued businesses, cross purchase agreements may help mitigate estate tax ramifications. Other hybrid strategies, such as the utilization of partnership entities and endorsement split dollar arrangements, have become popular ways to simplify the number of policies needed. However, it is important to note that these tactics have not been tested for IRS approval.

How can Gallagher help?

Gallagher is in a unique position to support you and your clients in this arena, providing extensive business consulting and succession planning expertise, skilled advanced marketing specialists and unparalleled proficiency in the fine points of financial underwriting.

Contact your Gallagher Life consultant to learn more about our comprehensive buy-sell review services.

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For Financial Professional Use Only. Not for Public Distribution.

GBS Insurance and Financial Services, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot ensure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.