The Washington Report: – Wealth Transfer Edition
“From the Desk of an Estate Planning Attorney: Buy-Sell Planning Since Connelly – What are we doing now?” KEY TAKE-AWAYS: Post-Connelly, closely held business owners must carefully consider the practical and various tax issues associated with life insurance funded buy-sell structures.
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The Washington Report: – Wealth Transfer Edition
“Given the rapidly evolving legislative landscape, advisors should get in front of clients now to create a plan on how to move forward if and when we start to see more certainty regarding upcoming tax law changes. For many clients, that planning should involve a review of business succession needs, as this is a largely underserved area of planning.”
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The Washington Report: – Business Edition
“The Court removed from the taxpayer’s arsenal of arguments the theory that a redemption obligation necessarily reduces the net value of a corporation. But even before the Court’s decision, many advisors had been hesitant to rely on that theory because of its flawed logic. Taxpayers still have multiple avenues available for structuring redemption agreements funded with life insurance. Given the Connelly decision, it is highly recommended that taxpayers review their sale and redemption agreements to determine what changes, if any, should be made in light of the Court’s decision.”
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“The Court’s little-noticed decision in Connelly v. United States, issued in June, throws a wrench into a common succession strategy for many closely held firms with more than one owner. In this strategy, a company buys life insurance on its owners so that when one dies, there’s cash to repurchase his or her stock. The goal is for the insurance payment to be tax-free and for the company to avoid the burden of funding a share repurchase from operating profits. In Connelly, however, the court ruled that the strategy didn’t provide the expected benefits. As a result, the owner’s estate owed nearly $900,000 more in estate tax….”The bottom line: For many closely held business owners, dealing with the Connelly decision requires help from advisers aware of both income- and estate-tax consequences. This advice won’t come cheap and could suck energy away from running the business. That’s an aggravation—but it’s not as big a pain as a surprise estate-tax bill.”
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The Washington Report: – Wealth Transfer Edition
“The IRS continues its attack on valuations, and there’s no end in sight. The U.S. Tax Court recently issued its decision in Estate of Cecil v. Commissioner. The decision is important because it contributes to the discussion whether tax affecting is necessary and/or appropriate when valuing an S corporation. Additionally, the decision reveals the zeal with which the IRS is pursuing wealthy taxpayers on valuation matters and highlights the importance of deep expertise needed for successful business succession planning and using reliable appraisals. Taxpayers with successful family-owned businesses who desire to retain ownership of the business within the family are well advised to engage advisors well versed in business succession planning. Reliable appraisals matter.”
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The Washington Report: – Business Uses Edition
“At question was whether the life insurance proceeds received by a corporation and intended for redemption in the context of a stock-purchase agreement should be taken into account when determining the corporation’s value at the time of one of the stock-holder’s death. Buy-sell arrangements (“BSAs”) address how the business or other business owners can “buy-out” an owner’s interests after a specified triggering event, such as death. To be effective, the terms and structure of a BSA must be tailored to the unique needs of each business and business owner; there is no “one size fits all” form. BSAs also should take a comprehensive approach to buy-outs, addressing not just an owner’s death, but also disability, divorce, and bankruptcy, among other events. BSAs create a ready market for the purchase of a deceased or departing owner’s interests at a fair value, which makes them a key component of a business owner’s financial and legacy plan. To obtain optimum results, business owners should coordinate with their insurance advisors, attorneys, accountants, and other financial advisors from inception to ensure the BSA is properly customized to their business and appropriately funded. Owners and their advisors also should conduct regular reviews of their BSAs and any funding sources, especially after any changes in the business’s ownership, tax status, or value.”
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