The Connelly Ruling
Nonetheless, because the Connelly case illustrates, the IRS’s therapy of life insurance coverage proceeds can have important tax implications.
The Supreme Courtroom’s ruling in Connelly affirmed that life insurance coverage proceeds, when used to fund a redemption obligation, don’t cut back the worth of the enterprise for property tax functions.
For LLC house owners, which means the proceeds from a life insurance coverage coverage may improve the taxable worth of the enterprise, probably resulting in a better property tax legal responsibility.
To safeguard a consumer’s LLC from these sudden tax penalties, work intently with a tax skilled who might help the consumer use these finest practices:
Evaluate and replace buy-sell agreements: Make sure that the consumer’s buy-sell agreements are up-to-date and replicate the present authorized panorama, together with the implications of the Connelly ruling. Enterprise house owners needs to be reviewing these agreements now within the mild of Connelly and, sooner or later, each three to 5 years.
Seek the advice of with advisors: A enterprise proprietor consumer ought to work intently with authorized and tax advisors to grasp how the IRS might deal with life insurance coverage proceeds throughout the consumer’s LLC construction. You, the tax advisors and the consumer ought to work collectively to develop methods to mitigate potential property tax liabilities.
Plan for liquidity: A enterprise proprietor consumer ought to make sure that the LLC has sufficient liquidity to cowl potential tax liabilities with out disrupting enterprise operations. This will contain setting apart further funds or exploring choices for deferring property taxes.
The Connelly resolution serves as a reminder of the complexities concerned in insurance coverage planning inside an LLC.
What you are promoting proprietor shoppers are answerable for guaranteeing their planning methods not solely defend their companies but in addition reduce the danger of unintended tax penalties.
By taking a proactive method and frequently reviewing insurance coverage preparations, these shoppers house owners can safeguard their LLCs’ future and supply peace of thoughts for all stakeholders.
The U.S. Supreme Courtroom constructing in Washington, D.C. Credit score: Bloomberg
Jack Elder is senior vice chairman of superior markets at CBS Brokerage.
