Trusts and Estates

Using keyman insurance to fund equity redemptions is likely to increase estate tax liability.
US Supreme Court holds that keyman insurance proceeds of company-owned policies are an asset of the company, regardless of a contractual obligation to fund an equity redemption.
Cross-purchase agreements funded by insurance should avoid these estate tax liability issues.

Effective succession and exit plans commonly use insurance as a funding vehicle to protect the owners from the economic effects of the death or disability of one of the principals. If an owner dies or becomes disabled, the insurance kicks in to fund the cost of a buy-sell agreement, ensuring a smooth transition of ownership.

The reason: When business owners die, the transition of their shares will disrupt the company and create financial burdens for the surviving shareholders or the company itself unless the owners have a plan in place.

The Importance of Keyman Insurance to Closely Held Businesses

To address this need, closely held businesses often use keyman life insurance in conjunction with buy-sell agreements. These agreements ensure that ownership transitions smoothly, and the business continues operating without major financial strain. (Insurance and other financial vehicles are also effective means of funding a transition out of the business for retirement.)

I am a lawyer, a certified valuation analyst, and a certified exit and succession planner. I have worked with the owners of closely held businesses throughout my career.

Contact me if you have questions about valuing your business, developing an exit plan, or implementing the legal bulletproofing necessary to protect your investment.

However, the structure and tax implications of the insurance-funded plan can differ depending on whether it is used in a redemption agreement or a cross-purchase agreement. After a recent United States Supreme Court decision imposing a million-dollar deficiency on an estate, closely held business owners need to review any insurance-funded plans to ensure that they are not unwittingly taking on an estate tax burden.

The Supreme Court Upsets the Status Quo

The Supreme Court’s landmark decision in Connelly v. United States is unwelcome news for those closely held businesses that have purchased keyman policies to fund the company’s purchase, or redemption, of a deceased shareholder’s interest. Continue reading

Articles Posted in Trusts and Estates

Supreme Court Decision Upsets Succession Planning Norms

Using keyman insurance to fund equity redemptions is likely to increase estate tax liability.

US Supreme Court holds that keyman insurance proceeds of company-owned policies are an asset of the company, regardless of a contractual obligation to fund an equity redemption.

Cross-purchase agreements funded by insurance should avoid these estate tax liability issues.

The Importance of Keyman Insurance to Closely Held Businesses

The Supreme Court Upsets the Status Quo

Arbitration Clause in Will is Not Enforceable

An arbitration clause in a is unlikely to be enforceable against a beneficiary unless there was to consent to arbitrate; it is unlikely to be inferred from the will alone.

An arbitration clause imposed as a condition of accepting the benefit of a trust is more likely to be enforced once the beneficiary has accepted the benefit of the trust.

A demand for a formal accounting is not considered a challenge to a will or testamentary trust.