The Supreme Court Just Turned a Technical Detail Into a Tax Time Bomb—Here’s What You Must Do Now
In the world of business succession planning, there’s now a legal Easter egg you absolutely cannot afford to miss.
We’re not talking about a pleasant surprise.
This one comes wrapped in a Supreme Court ruling—and it blew a $1 million hole in a business owner’s estate.
What’s the “Easter Egg”?
In tech and pop culture, an Easter egg is a hidden message. In this case, it’s a buried clause in your client’s buy-sell agreement or ownership structure of a life insurance policy—one that, if not handled correctly, could:
- Inflate the value of the business for estate tax purposes
- Nullify the intended tax-neutral treatment of insurance proceeds
- Trigger an unexpected — and massive — estate tax liability
This isn’t theory. This is Connelly v. United States and its Supreme Court precedent.
The Connelly Case, Unpacked
Connelly involved two brothers, a business, and a buy-sell agreement funded by life insurance. Simple enough, right?
But when one brother died, the business redeemed his shares using the life insurance death benefit. The IRS argued that the life insurance proceeds—owned by the business—increased the company’s value. The company tried to offset that value with the redemption liability.
The Court said: ‘Nope.’
The redemption obligation doesn’t count.
Result? The deceased owner’s estate owed $1 million more in taxes.
And here’s the twist: The problem wasn’t the idea—it was the execution. The business didn’t follow the valuation method laid out in its own agreement.
How Many of Your Clients Are Sitting on This Easter Egg?
If they have:
- An entity redemption buy-sell agreement, and
- The business owns the policy, and
- They haven’t had a recent formal valuation,
…then they are one audit away from a very expensive surprise.
The Fix: Strategies That Work Post-Connelly
Smart advisors are shifting to:
- Cross-purchase agreements to avoid entity inclusion
- Manager-managed LLCs (MMLLCs) to own policies outside the business
- Documented valuations that stand up to IRS scrutiny
This isn’t optional anymore—it’s urgent.
Your Takeaway?
The Connelly case isn’t just a headline—it’s a check-engine light flashing on every life-insurance-funded buy-sell agreement in the country.
Don’t assume it’s handled. Don’t assume it’s correct.
Be the one who finds the Easter egg before it hatches into an IRS audit.
BUSINESS VALUATION FACT FINDER
Download this editable PDF to use with all your business owner clients. Then book a meeting with Josh Rhem for next steps.
JOSHUA RHEM
VICE PRESIDENT – LIFE SALES
Joshua Rhem has over 15 years of experience in Insurance and Investment services, with experience as an RIA to financial institutions, an insurance producer, and wholesaler. Throughout his career Joshua has always been especially interested in making sure that insurance is viewed as a vital component of a well-constructed comprehensive financial plan. Understanding the obstacles that advisors face each day, Josh is eager to support them, and promptly responds to their needs. He enjoys helping advisors, brokers and agents grow their business with strategies to identify opportunities and helping to effectively position insurance products as meaningful solutions to their clients’ financial goals.
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