On June 6, 2024, the Supreme Court unanimously decided the case Connelly v. United States, involving the valuation of a business with a captive life insurance policy. In this case, two brothers were the sole shareholders of a business. The business had a buy-sell agreement that provided that upon the death of one brother, the survivor could buy out his deceased brother’s shares in the business using a captive life insurance policy. Upon the death of one brother, the survivor declined to purchase the shares, and the business redeemed them using the insurance proceeds. The deceased brother’s estate filed an estate tax return reporting the value of the shares at the surrender price. The value did not include most of the insurance proceeds because those proceeds were offset by the cost of repurchasing the shares.

In examining the estate tax return, the IRS disagreed with the company’s valuation, arguing that the value of the company’s interest should be increased by the amount of the insurance, essentially doubling the value of the company. The court argued that the company’s obligation to redeem shares was not a liability that reduced the value of those shares. Note that it is not entirely clear whether the decision would be the same for independent business owners.

In light of the court’s decision, business owners should be particularly aware that company-owned life insurance can significantly increase the value of the business for inheritance tax purposes.

For more information on the court’s decision, see: https://www.supremecourt.gov/opinions/23pdf/23-146_i42j.pdf

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