supreme court life insurance

Life Insurance Estate Tax Ruling


The Supreme Court’s decision in Connelly v. United States on June 6, 2024, addresses the tax treatment of life insurance proceeds in the valuation of a closely held corporation for estate tax purposes. The Court ruled in favor of the IRS, determining that life insurance proceeds payable to the company should be included in the company’s fair market value at the time of a shareholder’s death.

In this case, the company received $3 million in life insurance proceeds after the death of Michael Connelly, which the IRS argued should be added to the company’s value, making it almost $7 million. The Connelly estate contended that these proceeds should not be included because they were immediately used to buy back Michael’s shares. The Court, however, found that these proceeds do contribute to the company’s value as they represent assets that would benefit a hypothetical buyer of the entire company.

Impact on Business Owners:

  1. Valuation for Estate Taxes
    • Business owners must now consider life insurance proceeds payable to their companies as part of the company’s value when calculating estate taxes. This means higher estate tax liabilities if the company holds such policies.
  2. Estate Planning
    • Owners should reassess their estate plans and buy-sell agreements in light of this ruling. Proper structuring and documentation will be crucial to mitigate potential tax impacts.
  3. Corporate Structuring
    • Companies might need to reconsider the use of life insurance policies for buyout agreements and explore alternative methods that do not inflate the company’s value for estate tax purposes.

This decision underscores the importance of thorough and proactive estate planning for business owners, particularly those with closely held corporations and significant life insurance policies​.

Understanding Buy-Sell Agreements Funded by Life Insurance

The Supreme Court’s decision in Connelly v. United States has significant implications for buy-sell agreements funded by life insurance. Here’s a detailed explanation:

Buy-Sell Agreements

These are legal agreements among business owners to ensure smooth ownership transitions when an owner dies, retires, or otherwise leaves the business. The agreements stipulate that the remaining owners will purchase the departing owner’s share.

Life Insurance Funding

Many buy-sell agreements are funded by life insurance policies, where the company or the co-owners purchase policies on each owner. Upon the death of an owner, the policy proceeds are used to buy out the deceased owner’s share from their estate.

Impact of the Connelly Decision

  1. Valuation of Life Insurance Proceeds:
    • The Connelly ruling mandates that life insurance proceeds received by a company are included in the company’s fair market value for estate tax purposes. This means the insurance payout is treated as an asset of the company, thereby increasing its value​.
  2. Tax Implications:
    • The decision increases the potential estate tax liability. When a buy-sell agreement is funded by life insurance, the proceeds, now part of the company’s value, could push the estate’s taxable value higher than anticipated​​.
    • Business owners will need to account for this when planning their estate and consider the increased valuation’s impact on their overall tax obligations.
  3. Revisiting Buy-Sell Agreements:
    • Business owners may need to reassess the structure and terms of their buy-sell agreements. They should consider alternative funding mechanisms that might not inflate the company’s value for tax purposes.
    • It might also be wise to have a detailed valuation formula included in the agreement that clearly delineates how insurance proceeds are to be handled, potentially seeking ways to offset this inclusion if possible under future tax guidance​​.
  4. Estate Planning:
    • Comprehensive estate planning becomes even more critical. Business owners should work closely with tax professionals to understand the implications of this ruling and to explore strategies that can mitigate its effects.
    • Trusts, alternative funding sources, and other estate planning tools might be employed to better manage the tax burden​.

Strategic Considerations

  • Consulting Professionals: Given the complexities introduced by the Connelly decision, consulting with tax advisors, estate planners, and legal experts is essential. They can help navigate the nuances of the ruling and suggest adjustments to existing plans.
  • Regular Reviews: Continuous review of buy-sell agreements and overall estate plans ensures they remain effective and compliant with the latest legal and tax environments.


The Supreme Court’s decision in Connelly v. United States underscores the necessity for business owners to thoroughly understand and strategically plan their buy-sell agreements and overall estate plans. By including life insurance proceeds in company valuations for tax purposes, the decision increases potential tax liabilities, prompting a need for careful and proactive planning​ (ballotpedia)​​ (scotusblog)​​ (actecfoundation)​.

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