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Buy-Sell Restructure Post-Connelly: A Case Study

Below is our case study of the month. This month's topic is restructuring a buy-sell strategy in the face of the Supreme Court's ruling of the Connelly case. Written by Luke Rother.


Client

45-year-old owner of 15 medical clinics and surgery centers in the Midwest had completed funding his business buy-sell arrangement a few years ago. The business has five partners; thus, it was structured as an entity-purchase arrangement. In total the business owns $13,500,000 of life insurance on the life of the owner. The business also owned policies on the other partners of the clinics.

 

Situation

In June 2024, the Supreme Court of the US handed down and decision that affects entity-owned buy/sell arrangements. SCOTUS unanimously affirmed the IRS stance that life insurance proceeds used for share redemption should be included in business valuation. In effect, this increased the value of the business by the amount of the life insurance proceeds, which in turn increased the value of his estate for tax purposes. 

 

Assessment

This ruling put all business owners at risk who have life insurance funding their buy/sell agreement in an entity-purchase arrangement. In this case, the client’s estate liability could increase by $13,500,000 if he were to pass away and have his estate transferred.

 

Due to the number of owners, a cross-purchase arrangement was not attractive as they would need to purchase numerous other policies.

 

Solution

When the ruling was passed down, I contacted the CFO of the business and the financial advisor of the owner to discuss the ramifications of the ruling. We then consulted with the business owner’s attorney to brainstorm various solutions to present to the client.

 

As a team of trusted advisors, we determined to establish an insurance LLC that would own all the life insurance policies on the lives of the owners. The LLC would be a separate entity with the sole purpose of owning the business-related life insurance. In the case of death, the deceased owner could be removed as a partner of the LLC. The proceeds from the insurance could then be distributed to the remaining partners and used to purchase the deceased owner’s shares.

 

Result

The SCOTUS ruling gave the owner’s advisor team the chance to collaborate and plan a solution for the client. Knowing that his team was working together for his benefit allowed the client to experience a deeper level of trust in us as advisors. It also gave all of us trusted advisors the opportunity to work together and build a relationship for future client needs.

 

The new structure protects the client from the increased liability that could have potentially cost his heirs millions if it were not addressed.

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