On June 6, 2024 the Supreme Court of the United States decided in Connelly v. United States that the value of a company-owned life insurance policy death benefit must be included in the valuation of a closely held corporation for federal estate tax purposes regardless of any contractual redemption obligation imposed on the death benefit proceeds.

A corporation obtained life insurance on each of the corporation’s two sole shareholders so that if one of the shareholders died, the corporation could use the proceeds to redeem that shareholder’s shares.  One of the shareholders died, and the IRS assessed taxes on his estate, which included his stock interest in the corporation.  In valuing the estate, and the stock interest in the corporation held by the estate, the IRS took the position that the fair market value of the corporation included the life insurance proceeds intended for the stock redemption without a corresponding reduction in value attributable to the corporation’s obligation to redeem.  The U.S. Supreme Court affirmed this decision and stated, “An obligation to redeem shares at fair market value does not offset the value of life insurance proceeds set aside for the redemption because a share redemption at fair market value does not affect any shareholder’s economic interest”

Closely held companies should pay close attention to this opinion when structuring their business succession plans to avoid a dispute such as this one.  If you have questions structuring your succession plan the team at Lee and Crowley is available to help.