Buy-Sell Redemption Agreements – There’ll Be Some Changes Made!

There’ll be a change in the weather - And a change in the sea - And from now on there’ll be a change in me - My walk will be different - My talk and my name...

It was a bit before my time, but you can go on YouTube and call up the sultry singer, Julie London, performing the Overstreet/Higgins song, There’ll Be Some Changes Made.  And if a business redemption agreement could carry a tune, this is what most would be singing in response to the recent United States Supreme Court decision in the case of Connelly v. United States.

The Connelly brothers owned a building supply company and had a business transition agreement where, upon death, the company would redeem and retire the shares of the deceased at an agreed price.  The company owned life insurance on both to fund the redemption. 

Both assumed, along with just about everyone else, that the receipt of the death benefits from the company-owned policy would not inflate the fair-market-value of the business for death tax purposes.  Rather, any increase would be offset by the company’s obligation to purchase the deceased owner’s interest. 

SCOTUS did not agree.  The Court of Last Resort ruled unanimously that a business’s obligation to redeem a deceased owner’s interest is not necessarily a liability that reduces the business’s value for purposes of the federal estate tax.  Consequently, death benefits received on a company-owned policy increased the business’s fair-market-value by the same amount, any agreement to redeem the insured’s interest notwithstanding!

Much commentary is sure to follow, but consider a couple initial thoughts that your business-owning clients should discuss with legal and tax counsel:

• All existing redemption agreements funded with business-owned life insurance should be reviewed.
• If a currently funded redemption arrangement will result in unfavorable increases in death tax, perhaps structuring the business transition under a cross-purchase arrangement might prove more beneficial.
• Opting for a cross-purchase buy-out will require attention to avoid adverse income tax problems if ownership of any existing life contracts is changed.

It is worth reviewing the first three pages of the Connelly decision HERE.  Then call with any questions you have concerning clients and their current business transition plans, and those who are or should be implementing buy-out arrangements.  Contact Tom Virkler at 706-614-3796 or tom@cpsadvancedmarkets.com

For What It’s Worth:  As it will do, YouTube will call up related Julie London videos including the old Marlboro commercial in which she sings and lights her partner’s cigarette in a rather come-hither manner, quickly getting the whole viewing audience smokin’.  Connelly v. U.S. may soon make redemption agreements about as scarce as those cigarette television ads!