What You Must Know
- Intently held companies typically enter into agreements, funded by life insurance coverage, whereby the enterprise agrees to redeem a deceased shareholder’s shares.
- The IRS claims that the worth of that life insurance coverage ought to enhance the worth of the deceased shareholder’s enterprise pursuits.
- The Supreme Courtroom is tasked with resolving a cut up between how the Eighth Circuit and Eleventh Circuit have dominated on this difficulty.
A case being thought of by the U.S. Supreme Courtroom might have a widespread affect on one widespread succession planning follow that carefully held companies typically use to make sure continuity upon the loss of life of a key shareholder.
Intently held companies typically enter into redemption agreements whereby the enterprise agrees to redeem a deceased shareholder’s shares. These agreements are sometimes funded with life insurance coverage. The purpose, after all, is to make sure that remaining shareholders retain management of the enterprise after a key shareholder’s loss of life.
Within the case into consideration, Connelly v. United States, 23-146, the Inner Income Service claims that the worth of that life insurance coverage ought to enhance the worth of the deceased shareholder’s enterprise pursuits for federal property tax functions. The Supreme Courtroom is now considering easy methods to resolve a cut up between how the Eighth Circuit and Eleventh Circuit have dominated on this difficulty.
Whereas it stays to be seen how the justices will resolve, carefully held companies which have entered into redemption-type agreements ought to rigorously think about their funding choices — and the potential property tax affect of those preparations.
The Connelly Case Info
Connelly entails a state of affairs the place a carefully held company bought life insurance coverage on the lives of key shareholders. The enterprise right here was collectively owned by two brothers. Upon both shareholder’s loss of life, the surviving brother had the choice of buying the deceased brother’s shares. Within the occasion that the surviving brother didn’t decide to buy the opposite’s shares, the company would redeem them.
The company bought $3.5 million in life insurance coverage on every shareholder. When the primary brother died, the company acquired the life insurance coverage proceeds and, pursuant to the redemption settlement, redeemed the deceased shareholder’s shares within the company.
The deceased brother’s son and the surviving brother agreed that the worth of the deceased brother’s shares was $3 million. This worth disregarded the valuation approaches contained within the unique inventory buy settlement, which might have valued the decedent’s shares at $3.89 million. After the redemption, the decedent’s brother grew to become the only real shareholder within the enterprise and used the remaining $500,000 in life insurance coverage proceeds to fund enterprise operations.
The query being thought of is whether or not the $3.5 million in life insurance coverage proceeds acquired by the company needs to be thought of a company asset that might enhance the worth of the possession curiosity held by the deceased shareholder for federal property tax functions.