Connelly v. United States
The Facts
Michael Connelly, a shareholder of Crown C Supply, held life insurance policies on himself that the corporation owned and would use to redeem his shares upon death. When he died, the IRS included the $3.5 million in life insurance proceeds in Crown C's fair market value -- increasing the estate's tax base -- but the estate argued the $3.5 million redemption obligation offset the insurance proceeds, leaving net value unchanged. The Eighth Circuit sided with the IRS. The Supreme Court affirmed.
The Application
Under § 2031, the fair market value of Connelly's corporate shares includes the $3.5 million in life insurance proceeds because a hypothetical buyer would pay a premium for stock in a corporation with enhanced liquidity. The estate's offset argument that the redemption obligation reduces the net value increase fails because permitting such an offset would allow taxpayers to use corporate-owned insurance to artificially suppress the taxable estate. The insurance proceeds and the redemption obligation constitute a single economic arrangement, not separable items. The ruling ensures that corporate-owned life insurance used to fund shareholder buyouts cannot shelter value from estate taxation.
The Conclusion
**Unanimous 2024 ruling with significant estate planning implications for closely held family businesses.** Shareholders who own life insurance policies through their corporations to fund buyout agreements cannot offset the insurance proceeds against the redemption obligation in valuing the estate. Estate attorneys must account for this when structuring successor ownership plans.
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Case Analysis
Overview
Connelly v. United States (2024) held 9-0 that life insurance proceeds received by a corporation to fund a deceased shareholder's stock redemption agreement must be included in the corporation's fair market value for federal estate tax purposes, and cannot be offset by the corresponding redemption obligation. The ruling resolved a circuit split over how corporate-owned life insurance used to buy out deceased shareholders affects the taxable estate.
Facts
Michael Connelly, a shareholder of Crown C Supply, held life insurance policies on himself that the corporation owned and would use to redeem his shares upon death. When he died, the IRS included the $3.5 million in life insurance proceeds in Crown C's fair market value, increasing the estate's tax base, but the estate argued the $3.5 million redemption obligation offset the insurance proceeds, leaving net value unchanged. The Eighth Circuit sided with the IRS. The Supreme Court affirmed.
Issue
Whether life insurance proceeds received by a corporation to fund a share redemption agreement must be included in the corporation's fair market value for estate tax purposes, and whether the corresponding redemption obligation offsets that inclusion.
Rule
26 U.S.C. § 2031 taxes the fair market value of property in a decedent's estate at the time of death. Fair market value is the price a hypothetical willing buyer would pay a hypothetical willing seller. Insurance proceeds received to fund a redemption increase the cash available to all shareholders, including the buying shareholders, at the time of valuation, so a hypothetical buyer would pay more for the stock than if no insurance existed.
Analysis
Under § 2031, the fair market value of Connelly's corporate shares includes the $3.5 million in life insurance proceeds because a hypothetical buyer would pay a premium for stock in a corporation with enhanced liquidity. The estate's offset argument, that the redemption obligation reduces the net value increase, fails because permitting such an offset would allow taxpayers to use corporate-owned insurance to artificially suppress the taxable estate; the insurance proceeds and the redemption obligation constitute a single economic arrangement, not separable items. The ruling ensures that corporate-owned life insurance used to fund shareholder buyouts cannot shelter value from estate taxation.
Conclusion
**Unanimous 2024 ruling with significant estate planning implications for closely held family businesses.** Shareholders who own life insurance policies through their corporations to fund buyout agreements cannot offset the insurance proceeds against the redemption obligation in valuing the estate. Estate attorneys must account for this when structuring successor ownership plans.
Notes
OT2023. Added via SCOTUS bulk import 2026-05-14
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