We are providing this Alert to our clients and colleagues to inform you that, following the judgment recently issued in the case Thomas Connelly v. United States, business owners should review their buy-sell agreements to ensure that they comply with this updated ruling.
A buy-sell agreement is a contractual document that outlines what should happen in the event a business owner needs to transfer their interest in the company. A comprehensive buy-sell agreement will address the processes and buyouts required when a business owner can no longer be involved in the business for reasons including death, divorce, bankruptcy or retirement. A buy-sell agreement can also protect the business from loss of revenue and cover the expense of finding and training a replacement for the business owner.
In Thomas Connelly v. United States, two brothers acted as the only shareholders of Crown C Corporation, which had acquired life insurance on them. One of the brothers passed away, which led the IRS to evaluate the taxes on his estate, incorporating the value of his stock interest in the corporation. Importantly, the court included the life insurance proceeds to be used to redeem the decedent’s shares in the corporation’s fair market value.
In light of this ruling, existing buy-sell agreements should be reviewed, as life insurance owned by a corporation may be required to be included in a company’s value. Shareholders can no longer simply agree upon a buy-out price but should instead have the corporation properly appraised.
Please contact Paul Edwards at email@example.com if you wish to schedule an appointment to further discuss the foregoing and its possible impact.