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Coordinating Wealth, Protecting Legacies

Buy-Sell Agreements Will Result in Catastrophic Estate Tax under the Supreme Court’s Ruling: How You Can Protect Your Legacy

Tax Advice and Updates

Overview

For decades, companies have used corporately owned (“entity owned”) life insurance to “buy-out” the share of a deceased partner.  The insurance policy was not viewed as an asset of the company and, therefore, did not affect the estate’s valuation for estate tax purposes.  On June 6, 2024 that all changed!  The U.S. Supreme Court ruled in Connelly v. United States that Entity Purchased Life Insurance IS an asset of the company and, as such, will now increase the owner’s individual estate valuation for federal estate tax purposes.   

Because 40% of all current buy-sell agreements are funded with entity-owned life insurance, it is critical that every business reviews their current plans to determine if their plans need to be changed to avoid the punitive result of Connelly.

What are Entity-Purchase Agreements?

  • The Operating Agreement or Partnership Agreement provides that the business will purchase and own life insurance on each of the partners. At the passing of a partner, the life insurance is paid to the business which then distributes the proceeds to the decedent’s estate in exchange for his or her share of the business.  
  • Post-Connelly, life insurance proceeds increase the company’s value and thereby result in a cooresponding increase to the estate valuation for taxation purposes.

What are Cross-Purchase Agreements? (Legacy Recommended)

  • The Operating Agreement or Partnership Agreement provides that Each owner buys life insurance on the others and personally uses the proceeds to buy the deceased’s shares of the business.
  • Avoids insurance proceeds being included in the company’s value.
  • More complex with multiple owners, but much more tax efficient post-Connelly.

Recommended Action Steps

  • Audit all existing operating agreements for their buy-sell structure.
  • Consider transitioning to a Cross-Purchase structure.
  • Coordinate with Legacy Trust & Capital Partners’ Estate and Business Planning Teams to evaluate tax exposure.

 

Conclusion

The Supreme Court’s Connelly decision has rendered many traditional entity-purchase buy-sell agreements obsolete or dangerous from an estate tax perspective. Businesses and owners should act quickly to review their agreements to avoid unintended tax burdens.

Please contact our office to schedule a buy-sell agreement review or consultation.

Legacy Trust & Capital Partners

 

This commentary reflects the personal opinions, viewpoints and analyses of the Legacy Trust & Capital Partners employees providing such comments and should not be regarded as a description of advisory services provided by Legacy Trust & Capital Partners or performance returns of any Legacy Trust & Capital Partners client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Legacy Trust & Capital Partners manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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