Business Planning Using Life Insurance

Connelly v. U.S. – One Year Later

There are several ways that life insurance can enhance financial planning for your or your clients’ businesses.  From buy/sell funding to executive benefits, using discounted dollars by way of premium payments to fund certain expenses with a death benefit makes a lot of sense for many business owners.  Additionally, the cash value inside a permanent policy can be accessed to use as a living benefit.  Every business should consider life insurance solutions as part of their financial planning.

When establishing a new buy/sell agreement for a company, the shareholders should consider the possible ramifications of the Supreme Court’s ruling in Connelly v. U.S. when determining their preferred arrangement.  On June 6, 2024, the U.S. Supreme Court affirmed the 8th U.S. Circuit Court of Appeals’ decision in Connelly v. U.S.  This ruling determines that the value of the business at a shareholder’s death will be increased by any life insurance proceeds that are received without an offsetting reduction for the amount of the stock redemption liability. 

A year later and there is still uncertainty surrounding the implications of this ruling.  We continue to recommend exercising caution when implementing a buy/sell arrangement that is funded with life insurance.  The first step is to determine if the Connelly Supreme Court decision will be applicable due to familial versus non-familial ownership and each shareholder’s personal net worth.  Family-owned companies with shareholders who will incur estate taxes and might have considered stock redemption for their buy/sell arrangements in the past, might consider exploring different arrangements.

Each arrangement has its pros and cons, so there is no one size fits all solution. When considering the preferred buy/sell arrangement for a family-owned business, there are extenuating circumstances that can affect which arrangement will work for each company. For instance, family dynamics can play a huge part in how to structure the agreement. Other factors include the age of the shareholders (to determine an approximation of how far back the Connelly decision will be in the rearview at life expectancy), if their succession plan includes passing the company down within the family, and the shareholders’ sophistication for planning techniques that might require routine maintenance.

Click here to read more:  Responding to Connelly:  A guide to help advisors navigate the options

Contact us with any questions or opportunities to help you or your clients achieve identified goals.  This is what we enjoy doing for only a select number of families, businesses, and charitable institutions each year, and we look forward to hearing from you.