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Financial Planning > Trusts and Estates > Estate Planning

Supreme Court Rules Against Estate in Business Buy-Sell Case

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The U.S. Supreme Court ruled 9-0 Monday against an estate in a case involving use of life insurance in succession planning.

Two brothers, Michael Connelly and Thomas Connelly, required their St. Louis-based building supply business, Crown C Supply, to buy the stock of the first brother to die. They used life insurance to fund the buy-sell arrangement.

When Michael Connelly died, his estate assumed when calculating the business value that the stock redemption agreement liability offset the value of the life insurance.

The estate argued that the redemption agreement would leave the life insurance without value for Crown, because Crown would use the proceeds to redeem the stock.

The IRS said the estate should have included the life insurance proceeds as an asset, because the redemption agreement did not create an economic liability that would offset the value of the life insurance.

The 8th U.S. Circuit Court of Appeals sided with the IRS. The 9th Circuit and 11th Circuit sided with the estates in similar cases.

The Supreme Court agreed with the 8th Circuit.

The stock redemption agreement created no offsetting liability because it was not set up in a way that would cut the economic value of the supply company’s shares, Justice Clarence Thomas wrote in the opinion.

“A redemption obligation could, for instance, require a corporation to liquidate operating assets to pay for the shares, thereby decreasing its future earning capacity,” he wrote in a footnote. “We simply reject Thomas [Connelly]‘s position that all redemption obligations reduce a corporation’s net value.”

When valuing the business for estate tax purposes, the estate must assess how much Michael Connelly’s shares were worth when he died, before the supply company paid to redeem his shares, Thomas adds.

“A hypothetical buyer would thus treat the life-insurance proceeds that would be used to redeem Michael’s shares as a net asset,” Thomas writes.

The U.S. Supreme Court building in Washington, D.C. (Credit: Bloomberg)


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