Ensuring the seamless transition of ownership and safeguarding a company’s stability is of paramount importance to any closely held business.\u00a0 Buy-sell agreements play a crucial role in achieving these objectives. These agreements dictate the terms under which shares of the business can be bought or sold, typically triggered by events such as death, disability, retirement, or voluntary departure of an owner.\u00a0 A recent decision by the United States Supreme Court necessitates that owners of closely held businesses review their buy-sell agreements, particularly those that involve using life insurance proceeds to purchase a deceased shareholder\u2019s interest in the company.<\/p>\n
In a unanimous decision issued on June 6, 2024, the Supreme Court held that life insurance proceeds payable to a corporation are includible in the corporation\u2019s value for Federal Estate Tax purposes, with no offset allowed for the obligation to purchase a deceased shareholder\u2019s interest.\u00a0 Estate of Connelly v. United States<\/em>, 602 U.S. ___ (2024) (No. 23-146, June 6, 2024).<\/p>\n Michael and Thomas Connelly were the owners of Crown C Supply, a building supply corporation (the \u201cCompany\u201d).\u00a0 Michael was the CEO and owned almost 80% of the stock, with Thomas owning the rest.\u00a0 The brothers had entered into a buy-sell agreement that was to be effective in the event of their deaths.\u00a0 Under the agreement, the surviving brother was given the option to purchase the deceased brother\u2019s shares. \u00a0If he did not do so, the Company itself would be required to redeem the shares.\u00a0 The Company obtained life insurance policies of $3.5 million on each brother.<\/p>\n