In a recent decision, the ruling in Connelly v. United States has the potential to complicate the way businesses manage ownership transfers after an owner passes away or is away long term, increasing tax liabilities unexpectedly.
The case involved Michael and Thomas Connelly, brothers and co-owners of Crown C Supply, a building-supply company in St. Louis. The company then purchased $3.5 million in life insurance on each brother. The plan was that if one brother was unable to run the business, the company could use the payout to buy back the deceased brother’s shares, for a smooth ownership transition.
However, it only got more complicated. After Michael died in 2013, an IRS audit revealed that the life insurance payout should have been included in the valuation of the company. The Court found that the life insurance proceeds used to redeem the shares of the deceased brother were part of the company’s assets, and needed to be included in the company value.
It ended up being a whopping $900,000 in additional estate taxes for Michael’s estate.
So Why Does This Ruling Matter?
- Increased Tax Burden: Many small-business owners may now face higher estate taxes when they pass, leaving the burden of stress on their family.
- Importance of Proper Valuations: The ruling emphasizes the need for proper valuations, on a regular basis.
- Review Buy-Sell Agreements: The ruling highlights the critical importance of reviewing and updating buy-sell agreements.
Steps Business Owners Should Take
If you are a small-business owner concerned about the implications of this ruling, here are some important steps to take:
- Review Your Buy-Sell Agreement
- Get Regular Valuations
- Consult Tax and Legal Experts
For assistance with any business succession matters, contact our firm:
Roots and Wings Legal
Address: 1990 N. California Blvd., Suite 800, Walnut Creek, CA
Phone: (925) 289-8990
Email: info@rootsandwings.legal
Website: https://www.rootsandwings.legal
Disclaimer: This alert is for informational purposes only and does not constitute legal advice. Please consult a legal professional for specific guidance on your situation.
