Supreme Court Upholds Eight Circuit Estate Valuation

The U.S. Supreme Court unanimously ruled that life insurance proceeds purchased on the life of a shareholder did increase the corporation’s value for estate tax purposes. This case involved a business owned jointly by two brothers. Upon one brother's death, the surviving brother had the option of purchasing the deceased brother’s shares. If the surviving brother did not exercise the option, the corporation was required to redeem them. The corporation purchased $3.5 million in life insurance on each shareholder. When the first brother died, the surviving shareholder declined to purchase the shares. The corporation received the life insurance proceeds and redeemed the deceased shareholder’s shares in the corporation. The IRS challenged the estate's valuation approach and argued that the corporation’s redemption obligation did not offset the value of the life insurance proceeds. The IRS determined that the company’s total valuation was $6.89 million (based on the $3 million redemption amount and the $3.89 million valuation of the business). The Supreme Court agreed with that approach, citing the need to determine the shares' value at the time of death, before the company redeemed them. For more information on redemption-style business succession planning agreements, visit Tax Facts Online. : Q 8999. Note: Q is updated.