For your business owner clients looking to start succession planning, a recent U.S. Supreme Court case’s decision may factor into their current and future business plans – especially if utilizing a buy-sell agreement with life insurance.

The Connelly vs. US case decision recently ruled that life insurance proceeds paid to a business inflate the fair market value of the business, but that the business entity’s obligation to redeem a shareholder does not correspondingly reduce the value, according to a recent document released by Principal. (Contact the AIPMA Business Development team to request a copy of this document.)

As such for estate tax purposes, the deceased business owner’s interest is increased by the life insurance proceeds received by the business in proportion to the owner’s percentage of ownership. Based on the Court’s decision, entity redemption buy-sell plans may become a less attractive option for business owners due to guidance on how life insurance is treated when calculating fair market value for estate tax purposes.

A recent Insurance News Net article also touched on this subject as Andrew Rinn, associate vice president of advanced markets at Sammons Financial Group (North American is one of their companies/carriers), writes about the situation in more detail concerning entity purchase stock redemption buy-sell agreements.

He explained how the Internal Revenue took a different stance on the Connelly brothers’ (Michael and Thomas) shares, which increased the potential estate tax liability by almost $900,000. You can see Rinn’s breakdown in the middle of this article.

Going forward, Rinn states two strategies for structuring buy-sell agreements to minimize potential estate tax liabilities: review entity buy-sell agreements with tax, legal, and valuation advisors for tax implications; and consider cross-purchase agreements when two shareholders exist.

AIP Marketing Alliance, an Integrity Company, is keeping an eye on this situation as this Supreme Court ruling impacts business owners and their succession planning using life insurance. Our team has agent-approved materials available from multiple insurance carriers, which cover ideas and strategies to handle buy-sell agreements moving forward.

You can request these additional materials from our Business Development team at (800) 783-5206 Press #2 or marketing@aipma.com. AIPMA encourages you to review the INN article as well.

NOTE: This information is for informational and educational purposes only. Consumers should contact their tax, legal, and/or valuation advisor for tax/legal advice in this matter.

For more than 40 years, AIP Marketing Alliance (AIPMA), an Integrity Company, serves as a premier life insurance and annuity distribution partner to provide full-service support to independent wholesalers, brokerages and agents from our Troy, Michigan office. NOT AFFILIATED WITH OR ENDORSED BY THE GOVERNMENT OR THE MEDICARE PROGRAM.

AIP Marketing Alliance is committed to MORE in ’24 as we are launching a bunch of new resources to support our independent insurance wholesalers and agents. Visit our blog on aipma.com to stay informed on these upcoming launches and learn why wholesalers nationwide choose AIPMA as their distributor for selling life insurance, annuities, long-term care insurance, final expense, and much more. Ask about our lead services, myAIP CRM platform with customizable recruiter portal, and online tools/resources designed to grow your business.

AIP Marketing Alliance, an Integrity Company, has developed this electronic communication for informational and educational use only. Be advised, AIP Marketing Alliance, Inc. does not provide legal advice, tax advice, or guidance on issues involving securities laws, insurance laws nor securities or insurance regulations. This material should not be relied on as providing any such advice or guidance to either agents or retail consumers. Within this communication, AIPMA shares links for usage as information only. This content should not be interpreted as solicitation to purchase life insurance, annuities, or other products or as advice designed to meet your clients’ specific needs. Content involving fiduciary, tax, or legal advice should be directed to your legal, tax, and financial professionals for specific advice or product recommendations. AIPMA will not accept any legal liability resulting from any use of 3rd party material(s).