Dominic Liberi and Warren Ayres Discuss Life Insurance in Funding Buy-Sell Agreements in Palm Beach County Bar Association Bulletin

Obermayer Partners Dominic Liberi and Warren Ayres explore the implications of using life insurance to fund buy-sell agreements in the July/August edition of the Palm Beach County Bar Association Bulletin. Their article, titled “Warning: Use of Life Insurance in Shareholder Buyouts Can Be Costly,” examines the recent U.S. Supreme Court ruling in Connelly v. United States (June 6, 2024). The Court unanimously decided that when a corporation-owned life insurance policy pays out proceeds upon the death of a shareholder, these proceeds must be included in the company’s assets for federal estate tax purposes, without accounting for the company’s buyout obligation as an offsetting liability. This ruling significantly increased the estate tax liability in the case.

The Connelly decision highlights the importance of carefully structuring buyout arrangements in the event of an owner’s death. For businesses with multiple owners that use life insurance policies to fund buyouts, the ruling underscores the potential for severe estate tax consequences if the company is named as the beneficiary for the purpose of redeeming ownership interests.

You can find the full article on page 23 of the Bulletin.