LIFE INSURANCE PROCEEDS FOR REPURCHASE OF DECEASED BUSINESS OWNER’S STOCK MAY RESULT IN ESTATE TAX LIABILITY

On June 6, 2024, the Supreme Court of the United States ruled in Connelly v. United States that proceeds of a life insurance policy purchased by a company on the life of one of its owners to fund a stock redemption obligation for the repurchase of a deceased stockholder’s shares pursuant to a buy-sell agreement was not an offset because it was not a liability of the company.  Instead, the Court ruled, the exchange of shares for the proceeds of the life insurance policy provided value to the company, thus raising the value of the deceased stockholder’s shares.  As a result, the increase in the value of the deceased owner’s shares estate increased the value of the deceased owner’s shares, resulting in an estate tax liability.  The Court thus overturned the Eleventh Circuit Court of Appeals’ 2005 ruling in Estate of Blount v. Commissioner, 428 F. 3d 1338 (11th Cir. 2005), which concluded that insurance proceeds should be deducted from the value of a corporation when they are offset by an obligation to pay those proceeds to the estate in a stock buyout.