Supreme Court Decision Shakes Up Succession Planning: 5 Essential Next Steps for Business Owners
- No Comments
Recently, the US Supreme Court issued a ruling that will significantly impact business owners and the practice of funding entity purchase buy-sell arrangements with life insurance. Following the decision of Connelly vs. United States, the value of a business owner’s life insurance death benefits must now be included in the overall valuation of a business in certain circumstances.
This decision will lead many business owners to reanalyze their estate tax planning strategies and open the door to several new questions. Would the valuation of your life insurance policy as an additional business asset result in higher estate taxation? Should your existing buy-sell arrangements that are already funded with a life insurance policy be revised or modified?
Now is the time for business owners to consult with their corporate attorneys to review existing corporate agreements and determine how their business will be valued in the event of their passing. Following this step, we recommend business owners meet with an experienced estate tax attorney to determine how exactly this recent ruling will impact their current estate plan.
When consulting with an estate tax attorney, here are the five key actions for business owners to consider in the wake of Connelly v. United States:
1. Review Your Buy-Sell Agreements
As a business owner, do you have a current buy-sell agreement in place for your business? If so, is the agreement properly structured, funded, and up to date?
The structure of these buy-sell agreements can significantly affect the estate tax liabilities for your estate plan. A corporate attorney can help ensure that your buy-sell agreements are structured with all relevant tax implications in mind—including this recent Supreme Court decision. We encourage business owners to maintain detailed records of their buy-sell agreements and other relevant documents in light of the Supreme Court’s recent ruling to avoid any potential IRS disputes.
2. Consider New Cross-Purchase Agreements
The Supreme Court’s decision will likely result in a major inflation of estate tax values for business owners. Cross-purchase agreements, where shareholders (or trusts established for the shareholder’s benefit) purchase insurance on each other, can help avoid complications and higher estate taxes by ensuring that life insurance proceeds are used for the purchasing of business shares and are not included in the value of the business for estate tax purposes.
Cross-purchase agreements are common in many business succession plans, as they allow shareholders to maintain control of the business in the event of an untimely death, departure, or disability. In the wake of Connelly v. United States, we expect the inclusion of Cross-Purchase Agreements in succession plans to become even more ubiquitous.
3. Evaluate Your Life Insurance Policies
If you have not recently reviewed your current life insurance policies, we highly recommend conducting a formal review. Work to ensure that your policies still consider all relevant contingencies and operate in concert with your financial, tax, retirement, and estate plans.
Work with an attorney to better analyze the impact of your life insurance policies on your estate’s valuation. Ensure that your policies are adequately valued and structured to avoid unexpected tax liabilities that could arise from the Connelly v. United States decision. Consider exploring the possibility—particularly considering this new ruling from the Supreme Court (as well as potential changes to the exemption limits)—of purchasing a new life insurance policy.
4. Seek Professional Valuation and Consult with Tax and Legal Experts
To better navigate a post-Connelly landscape, business owners should be prepared to answer four key questions:
- Do I have a trusted team of experts who can help guide me through these changes and ensure my family’s future financial security?
- Do I have a detailed and thorough financial plan in place that sufficiently addresses the current and future of my business interests and assets?
- Have I set aside the funds necessary to cover potential estate tax liabilities arising from share redemptions and corporate obligations?
- Do I have workable and realistic exit strategies in place that will help maximize the value of my business after I leave?
To help answer these questions, we recommend that business owners regularly meet with estate planning attorneys and tax advisors. Review and update all relevant corporate agreements and structures, ensuring they align with current laws and court rulings. Additionally, business owners would benefit from consistent professional valuations to better understand the potential tax impacts of the laws and rulings and ensure compliance with current regulations.
5. Meet with Your Estates & Trusts Attorney
At Sessa and Dorsey, we work with our clients to prepare an asset alignment chart designed to help business owners better understand their assets (both liquid and illiquid) and determine if we need to enlist the services of other professionals, such as a corporate attorney or life insurance advisor to round out their estate plan and tax strategies. We encourage you to have a formal review of your assets, including your life insurance policies, as well as the current buy-sell agreements you have in place for your business.
Contact Sessa & Dorsey, today to learn how you can better maximize the value of your estate, minimize your estate tax liabilities, and work toward a smooth transition of business ownership. If you have questions, please contact us at (443) 589-5600.
Related blog posts:
3 Ways to Modify Your Trust Agreement for Changing Circumstances
How to Make Leveraged Use of Your Federal Lifetime Estate and Gift Tax Exemption
What Is the Corporate Transparency Act, and Does It Apply to You?
New Rights for Domestic Partners in Maryland
End-of-Summer Checklist: 6 Financial Considerations and Annual Maintenance Reminders