Estate Planners Look for Way Out of Connelly Chains

There is a significant corporate cost over many years to establishing and maintaining such a plan, to allow for a smooth transition at death, protecting other owners and all the employees.

How big do you expect the impact of the ruling on companies to be?

This depends on a company's position, size, access to other funding obligations, number of owners and then each of their respective ownership percentages.

Generally, the larger any individual ownership percentage is, the larger the potential difficulty would be to smoothly replace that person and redeem their stock, without impairing operations.

Some analysis should be performed to see what the size of the issue might be. From there, solutions can vary but must be executed carefully. For instance, there can be significant tax ramifications when removing policies from the corporation.

How complicated will calculating the impact of the ruling on valuations be?

Understanding the potential impact is not easy. The full value of the company, then of the individual ownership interests, and how existing policies work, all need to be coordinated and the correct flow followed.

The potential tax ramifications of moving any whole-life policies are not straightforward. The policy value for such purposes is called the policy "terminal interest reserve." This is a specific calculation done by the insurance company, and it is not the same as a policy's cash surrender value.

What should financial professionals do if they were recommending the kind of strategy affected by the court ruling?

It is important for them to look to quantify the potential problem now that we know of this decision. There is no shortcut here.

They should look to answer questions including:

• At worst application, what would the result be?
• Is any part of a redemption obligation liability a valid liability for valuation purposes following this ruling?
• Can we make any adjustments to the corporation that will allow for a greater inclusion of these redemption obligations?

Insurance industry and estate planning advisors are working now on new, different solutions. These alternatives continue to evolve currently.

The alternatives, again, depend on the situation and answers to important questions like:

• Who owns the company?
• How large is the company?
• What type of tax entity do we have?
• How many owners are there?
• Are the owners family?
• How old is everyone?

Trusts can be used when all owners are in the same family. This has been done for years through irrevocable life insurance trusts, or ILITs.

The ILIT redeems the stock of a descendant from their estate, but when there are two, three or more families involved, as soon as owners start dying, the trust arrangements get very convoluted and are difficult to change.

I think the most important thing is to remember that any arrangement needs to be flexible. There are constantly new owners coming and going, new younger owners, older owners retire before they die, etc. Because the ownership group changes so often in so many situations, so too must any solutions.

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