February 10, 2025
The proceeds of life insurance owned by a company for the purposes of redeeming a shareholder’s shares upon death increase the value of the company’s stock according to a June, 2024 decision of the United State Supreme Court.
In this case, two shareholders of Crown C Corporation had a stock purchase agreement funded by life insurance policies on each other. When one of the shareholders died, the company used the $3.5 million in life insurance proceeds to buy back the shareholder’s shares for $3 million and $500,000 went back into the company. The IRS contested this valuation resulting in a $1 million tax deficiency notice to the deceased shareholder’s estate. The Court ruled that an obligation to redeem shares at fair market value does not offset the value of the life insurance owned by the company to redeem the shares. If the shareholders had owned the life insurance personally subject to a cross-purchase agreement, Crown C would never have received the life insurance proceeds and its stock value would not have been affected.
Companies that have funded stock redemption agreements with life insurance owned by the company are encouraged to review the structure of ownership with their tax professional.
If you have any questions about this or any other employment law matter, please contact Dean Leazenby at (574) 294-7491 or [email protected].