Is It Time to Review My Business’s Ownership Agreement?

In June 2024, the United States Supreme Court issued an important decision in a case called Connelly v. United States. The decision has huge implications for business owners working on their estate plans, and there are several approaches that businesses can take moving forward in light of the decision. Because the decision itself is technical, it can be difficult to parse out how to react. With the right Boulder estate planning attorney, though, you can ensure that your estate plan is appropriately responsive to the Connelly decision. On today’s blog, we offer a brief review of the Connelly decision as well as some ideas for how businesses can review their ownership agreements with the decision in mind.

Legal Landscape Pre-Connelly

As the legal landscape stood before the Connelly decision, it was common for companies with business succession plans to include the use of life insurance policies to fund a buy/sell agreement. In the past, case law has allowed estates to exclude insurance proceeds when valuing business interests in buy/sell agreements. This reality, in turn, has allowed companies to account for life insurance policies without having to worry about the Internal Revenue Service (IRS) including these policies as part of their business valuations. When the life insurance policies were excluded, businesses’ estate tax bills were necessarily lower. This is the background against which the Supreme Court decided Connelly on June 6, 2024.

The Decision

In its decision, much to business owners’ dismay, the Supreme Court decided that insurance proceeds should actually be included in a business’s valuation. According to the Court, an insurance payout in this context is interconnected to the business structure itself, and therefore it makes sense to value the business with the insurance payout in mind. Because life insurance policies have not traditionally been included in business valuations, the decision marks a huge shift in how businesses will think about the value of their company and the way they formulate their estate plan. It is worth noting that because the decision came out of the Supreme Court, it affects all businesses across the country – no district or state is immune.

The Implications of the Decision

How, then, should businesses proceed post-Connelly? What makes sense as a next step? To start, each business will have to make a decision on how to draft their estate plan in coordination with an experienced estate planning attorney. Estate planning attorneys are accustomed to changes in the law, and they will be able to give advice on how to redraft a compliant and creative estate plan in light of the Connelly decision.

With that in mind, businesses will have several options moving forward. First, businesses could shift from redemption agreements to cross-purchase agreements. The difference between the two types of agreement is critical: in a redemption agreement, the company’s interest would necessarily be included with the value of the business. In a cross-purchase agreement, by contrast, the company has no interest in the decedent’s life insurance proceeds. Instead, in a cross-purchase agreement, co-owners hold life insurance policies on each other in order to fund the agreement.

Business owners could also explore the possibility of increasing insurance coverage to fund the business’s purchase price as well as any tax burdens that come along with it. This could allow owners to keep their current structure in place; it just becomes more expensive for businesses to cover the cost of their insurance.

There are also different choices that businesses could make apart from the more obvious cross-purchase agreement, if business owners do choose to opt for restructuring their ownership agreements. One example is an irrevocable life insurance trust, which allows businesses to own policies outside of their estate. In general, businesses should be looking for options that avoid reliance on more traditional models, which have tended to assume that life insurance policies would not be part of the overall business valuation. Businesses should be looking for ways to keep their tax burden down even as the Supreme Court has made this more difficult in a post-Connelly world. While this can be frustrating to navigate, the circumstances can also offer an apt opportunity to review business structures and their overall estate plans.

Reviewing Your Ownership Agreement: Is Now the Time?

The Connelly decision represents only one reason that we think it is smart to take the time to review your business’s ownership agreement now. As the end of the year quickly approaches, businesses should also be taking stock of their current structures and making sure everyone is on the same page before the new year. As you review your business’s ownership agreement, we offer two pieces of advice to keep in mind: 1) communicate early and often with all involved parties and 2) retain expert estate planning services as you think through new possibilities. If you can accomplish both of these goals, you can make sure your ownership agreement is both cohesive and thorough, both agreeable to all involved and methodical in its approach.

Call a Boulder Estate Planning Attorney to Discuss Your Next Steps Today

Because the US v. Connelly decision is so recent, and because businesses are still trying to figure out navigate a post-Connelly estate planning world, it is the perfect time to get in touch with an experienced Boulder estate planning attorney. At the Braverman Law Group, we believe that informed choices lead to peace of mind for our clients. That is why we always take the time and energy to walk each client through their estate planning options, tailoring our advice to each person’s goals and circumstances. Our team works hard to deliver results for our clients, because we care about providing the highest quality representation possible.

For a free, no-obligation consultation with one of our Boulder estate planning attorneys, give us a call today at (303) 800-1588. If you prefer, you can also fill out our online form to tell us about your legal issue and have a member of our team reach back out to you as soon as possible. Our firm covers estate planning, trust administration, special needs planning, Medicaid planning, and more.