Supreme Court Ruling Could Hike Taxes When Business Is Passed

A recent unanimous Supreme Court ruling impacts companies’ life insurance-funded buy-sell agreements and could potentially create thousands of dollars in extra taxes for some estates. Neil V. Carbone and David Goldstein shared their insight with Financial Advisor on potential disruptions this might cause.

From the article:

“The death of an owner of a closely held business has the potential for disruption,” said David Goldstein, partner and trusts and estates lawyer at Farrell Fritz in New York. “From the business’s perspective, the loss of a key person may impact the business’s ability to operate profitably. From the owner’s family’s perspective, the owner’s death may adversely impact the family’s financial situation—both because of lost income and estate taxes. To proactively address both issues, many owners in this situation will enter into buy-sell agreements during their lives.”

These agreements require either the company (in a redemption agreement) or the surviving owner or owners (in a cross-purchase agreement) to buy out the deceased owner, with the goal being to minimize disruption due to the deceased owner’s death, Goldstein said. “Life insurance is often a mechanism for the company or surviving owners to fund their obligations under buy-sell agreements,” he said.

In the Supreme Court case, Michael Connelly’s shares were valued significantly higher for estate tax purposes than for redemption purposes, said Neil Carbone, a partner and a trusts and estates lawyer at Farrell Fritz in Uniondale, N.Y.

“[Michael’s] estate received $3 million for his shares and expected to pay $1.19 million in estate taxes,” Carbone said, “leaving his heirs with $1.81 million. Instead, based on the higher valuation of the shares, his estate will pay $2.12 million in estate taxes, leaving only $880,000 for his heirs.”

Read the full article on Financial Advisor here:

Supreme Court Ruling Could Hike Taxes When Business Is Passed