The U.S. Supreme Court excited estate planners Friday by issuing a decision on an estate-planning case.
The court ruled 9-0 that the estate of Michael Connelly, one of the brothers who owned Crown C Supply, a St. Louis-based building supply business, must include the value of life insurance benefits used to fund a stock redemption agreement when calculating the net value of the business for tax purposes.
Justice Clarence Thomas wrote in an opinion for the court that Connelly and his brother, Thomas Connelly, set up a buy-sell arrangement that used the stock redemption agreement in such a way that the agreement had no economic impact on the value of the business.
Moreover, for tax purposes, Michael Connelly's estate had to use the value of Crown C at the time that he died, before Crown C used any life insurance proceeds to buy back his stock.
The ruling means that, based on Internal Revenue Service calculations, Crown C had a net value of $6.86 million when Michael Connelly died, rather than $3.86 million, as Michael Connelly's estate had reported.
What does the ruling mean for financial professionals and their clients?
Here are seven implications, based on the reactions of tax and estate planning specialists.
1. The ruling is definitely a hot topic for anyone interested in estate planning, business succession planning or planning-related business valuations.
The ruling is "already famous" and will "likely change dramatically the way redemption life insurance is structured in estate plans," according to Jim Alerding, a valuation consultant who writes for Business Valuation Resources.
2. Any clients who have business buy-sell arrangements or other succession planning arrangements in place should check in with their tax and succession planning advisors.
Jonathan Nelson, an estate, probate and trust administration expert at Smith Pugh & Nelson, is one of many commenters emphasizing the need for business owners to get advice from qualified experts.
"If you have a stock redemption plan, buy-sell agreement, or provisions in a shareholder agreement, operating agreement, or similar document which restrict transfers and direct the disposition of the ownership interests, please check with your counsel on whether a change should be made in light of Connelly," Nelson wrote.
3. The ruling could trip up business owner clients who fail to get, or act on, good legal advice.
The Small Business Legal Center at the National Federation of Independent Business was one of the entities fighting for the Connelly estate and against the IRS.
Beth Milito, the center's executive director, said she worried about the implications of the new ruling.
