BIG DOLLAR SCOTUS CASE HAS MAIN STREET APPLICATION.
In the Estate of Connelly, the United States Supreme Court added $4 million in value to the estate of a deceased business owner because the shareholders (the deceased and his brother) did not follow the terms of the stock purchase agreement. That agreement provided for periodic review of the business value, but this was not done.
The cost: over $700,000 in additional federal estate tax. The focus was on the absence of periodic reviews of value not only called for in the agreement, but perhaps by common sense.
$3 million of the valuation increase was due to the proceeds of a life insurance policy payable to the business.
Don’t let the big dollar value increase mask the importance of the case. If you have a buy-sell agreement, whether it is a redemption, or a cross purchase, be sure to follow its terms. If it does not have a requirement for periodic review, do so anyway AND DOCUMENT IT!
Also, if you have a redemption agreement funded by life insurance, review that approach to see if it would avoid some level of taxation.
Think your business is too small because of the high federal threshold before an estate tax payment is due? Think again! States with lower tax barriers are likely to pick up on the impact of this case. And given the states are always looking for additional revenue, one would think they are drooling over this opportunity. Mini Connelly cases are coming.
For more information and a discussion of business valuation and buy-sell methods, contact Barry Koslow, JD. 781-724-6695 or barry.koslow@secbenne.com.