[1]In a recent unanimous decision [2], the U.S. Supreme Court held that life insurance proceeds received by a corporation to redeem a deceased shareholder’s stock increases the value of the corporation for estate tax value purposes, and does so without an offsetting reduction for the corporation’s obligation to redeem the deceased shareholder’s stock.
Note that the ruling applies to all types of business entities, not just corporations. The impact of the ruling is that the overall estate value in question may be higher than initially planned. With the estate tax topping out at 40%, any addition to an estate value can have a significant impact (as was the situation in this case [2], which resulted in an increase in the estate’s value by $2.3 million, with $920,000 in additional tax). As such, business owners utilizing company-owned life insurance to fund buy-sell agreements should have their overall estate plan reviewed to ensure that the most optimal structure is in place to accomplish their goals, yet minimize taxes.
We are recommending that any business owner who has a company-owned life insurance policy (or the company is a beneficiary of life insurance upon an owner’s death) have their estate plan reviewed with their estate attorney. For more specific details, please contact your ShindelRock tax professional. [3]