In a landmark decision that could impact estate planning across the United States, the Supreme Court has unanimously ruled in favor of the Internal Revenue Service (IRS), setting a precedent for how life insurance proceeds are factored into estate taxes. The ruling, delivered on June 6, reaffirmed the IRS’s stance that life insurance proceeds must be included in the estate valuation of deceased shareholders’ stocks in family-held corporations.
Justice Clarence Thomas, writing the unanimous opinion for the court in the case titled Connelly v. Internal Revenue Service, articulated a clear stance on the issue. The dispute originated from a family-owned building materials business in St. Louis, Crown C Corp., following the death of Michael Connelly in 2013. Michael had held a majority share in the corporation, which was under scrutiny by the IRS for the underreported value of his stock influenced by life insurance proceeds.
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Traditionally, closely held corporations often buy life insurance on shareholders to fund buy-back agreements upon their death, thereby maintaining the business within the family or a small group of owners. This practice was at the heart of the Connelly case, where the life insurance proceeds were designated to purchase Michael Connelly’s shares from his estate.
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