Insured buy-sell agreements have long been a key component for succession planning for closely held businesses.  A buy-sell agreement is a legal contract that sets forth the terms for the transfer of a deceased owner’s share of the company on death. The purchase price or the methodology for determining the purchase price is detailed in the agreement so that there is no uncertainty regarding the price and terms of the buy-out. Buy-sell agreements are often funded using insurance policies on the lives of the owners and can be structured either as a cross-purchase agreement or a stock redemption agreement.  Each type of agreement has advantages and disadvantages the owners must consider when deciding upon the best plan for their situation. However, a recent U.S Supreme Court case has made stock redemption agreements less attractive from an estate tax planning standpoint. 

In a stock redemption agreement, the business owns one or more policies of insurance on the lives of the owners. If the agreement is funded by insurance, the company collects the policy proceeds on an insured’s death and uses the proceeds to purchase or redeem the deceased owner’s interest in the company. The Court’s recent decision states that the proceeds of the policies are includable in the estate of the deceased owner and must be taken into account in determining the value of the deceased owner’s interest in the business thereby potentially causing an adverse estate tax consequence for the deceased owner. 

Business owners who are parties to buy/sell agreements funded by insurance could be impacted by the recent ruling of the U.S. Supreme court. We encourage all business owners to have their buy/sell agreements reviewed by tax counsel. 

For more information on this topic, please contact Bruce Bell ([email protected]) or Christian Manalli ([email protected]) by e-mail or call (312) 648-2300.