20 Aug Company Owned Life Insurance included in Estate – the impact of the Connelly case
A recent Supreme Court Case – Connelly vs the IRS, has sent shock waves through the closely held business community.
The Supreme Court ruled that Company owned life insurance increases the Company’s value for purposes of determining the value of the deceased owner’s taxable estate. Previously the death benefit was not factored into the Company’s value presumably because of the notion that the Company had a corresponding liability – to use the proceeds to purchase the deceased owner’s interest in the business from his or her estate.
In some situations, the inclusion of Company owned life insurance (in the value of the business), will result in the deceased owner’s estate incurring additional Federal Estate Tax (which currently taxes assets above the Federal Estate Tax Exemption amount* at the punitive rate of 40%). In Connelly, the deceased owner’s estate incurred an additional estate tax of roughly $900,000 as a result of the ruling.
It’s important to distinguish that Connelly involved insurance policies owned by the Company, rather than policies owned by the owners of the Company themselves – commonly referred to as a “Cross Purchase” insurance structure**. In Connelly, the Company owned policies were available for the purchase of the decedent’s interest in the Company from the decedent’s estate. It’s the ownership of the polices by the Company itself which increased the Company’s value per Connelly.
Therefore, given the Connelly ruling, if you have Company owned life insurance or a structure where a separate (from the Company) LLC has been formed to own policies on the owners’ lives, please contact your Kathmere Wealth Management team to discuss whether the Connelly ruling may negatively impact you or your fellow owners and, if so, to discuss potential solutions.
*The Federal Estate Tax Exemption is currently $13.61 million, but is scheduled to decrease to $5 million at the end of 2025 (and will likely end up being $7 million after an adjustment for inflation).
* *Under Cross Purchase, the owners of the Company own insurance on the lives of the other owners of the Company. The Company’s buy-sell agreement would ordinarily require the owners of such policies to purchase the interest of a deceased owner from his/her estate. Cross Purchase structures do not appear to be impacted by Connelly.