Imagine this: You own a family business, and you’ve set up a life insurance policy to help with ownership transitions. But now, thanks to a new Supreme Court ruling, that insurance payout might increase your company’s taxable value—triggering higher estate taxes.
Let’s break down the Supreme Court’s decision, how it impacts business owners, and what you should do to protect your assets.
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The Supreme Court Ruling: What Happened?
Case: Connelly v. United States
On June 6, 2024, the Supreme Court ruled that life insurance proceeds owned by a business must be counted as part of the company’s taxable value.
The Backstory
- Michael Connelly owned 75% of his family business, Crown C Supply.
- When he passed away in 2013, the company used a $3 million life insurance payout to buy back his shares.
- The Connelly family valued the business at $4 million, but the IRS argued it should be $7 million—including the insurance payout.
- The Supreme Court sided with the IRS, ruling that company-owned life insurance is a taxable business asset.
- This resulted in $889,914 in additional federal estate taxes for Michael’s family.
What does this mean for business owners? If your company owns a life insurance policy, the payout now counts toward your business’s taxable value, potentially raising your estate tax bill.
Why This Matters for Business Owners
Many business owners use life insurance for buy-sell agreements—to ensure a smooth transition when a partner or shareholder passes away.
But now, thanks to this ruling, life insurance proceeds owned by the company can:
✔ Increase your business’s taxable value
✔ Push your estate above the federal tax exemption limit
✔ Trigger a hefty estate tax bill for your heirs
Example: How This Could Impact Your Business
Let’s say you own 50% of a company worth $10 million. Normally, your estate’s taxable share would be $5 million, which is below the federal estate tax exemption.
But if your business also has a $3 million life insurance policy, the IRS will now count that toward your business’s value.
- New total business value: $13 million
- Your 50% stake = $6.5 million
- Now above the federal estate tax exemption, triggering additional taxes
This could mean your family inherits less—or worse, has to sell off business assets to cover the tax bill.
What Should Business Owners Do Now?
Given this ruling, business owners need to re-evaluate their estate planning strategies immediately. Here are three key steps to take:
1. Review Your Buy-Sell Agreement
✔ Make sure your agreement accounts for this new tax rule.
✔ Check whether life insurance payouts are structured correctly to avoid increasing your taxable business value.
2. Reassess Who Owns the Life Insurance Policy
To keep life insurance proceeds out of the company’s taxable assets, consider:
✔ Cross-Purchase Agreements – Instead of the company owning the policy, each shareholder owns a policy on the other shareholders.
✔ Setting Up an LLC or Trust – Holding policies outside the business structure can prevent the IRS from counting them as taxable business assets.
3. Consult a Tax or Legal Professional
The tax code is complex, and making the wrong move could cost you more in the long run.
✔ Work with a tax advisor or estate planning attorney to ensure compliance.
✔ Plan ahead—the federal estate tax exemption drops to $7 million in 2026, meaning more businesses will be affected.
What Happens Next?
This Supreme Court ruling has changed the game for business owners who use life insurance to manage succession planning.
If your business has a company-owned life insurance policy, now is the time to:
✔ Review your agreements
✔ Reassess how policies are structured
✔ Talk to a tax expert to avoid an unexpected tax burden
At Trailstone Insurance Group, we help business owners navigate these complex changes.
Need help reviewing your policies? Contact us today, and we’ll guide you through your options.
Disclaimer:
“I am not an attorney or a tax professional. The information shared in this article is for educational purposes only. Please consult your attorney or certified tax professional for personalized advice tailored to your specific situation.”
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