November 22, 2023

What Does the Connelly Case Mean for Financial and Estate Planning?

Written By: Daniel Gleich

Key Points 

  • The Connelly v. IRS case challenges the traditional exclusion of corporate-owned life insurance from a company's overall valuation, impacting business assessment and estate tax planning.
  • Wealthy business owners face potential estate tax consequences as previously excluded assets may become subject to taxation, necessitating a strategic approach to financial planning and buy-sell agreements.
  • Madison Trust offers expertise for and collaboration with financial professionals to help their clients navigate the complexities of the Connelly case and evolving regulatory developments.

In financial and estate planning, it’s important to remain vigilant and well-informed about the latest legal developments. One recent development in the financial sector is the Connelly v. IRS case. Here’s what financial advisors (particularly those whose clients use life insurance as a strategic financial tool) and individuals need to know.

Understanding the Connelly Case

two business men in a meeting talking about the Connelly v. IRS case

At its core, the Connelly case revolves around a fundamental shift in the treatment of corporate-owned life insurance within a company's overall valuation. To put it simply, this case challenges the status quo regarding how businesses evaluate their worth. Previously, corporate-owned life insurance was often excluded from the valuation equation, creating a buffer against estate taxation for many business owners.

The Connelly case disrupts the established norm. It brings corporate-owned life insurance into the spotlight, requiring it to be included in the overall value of a company. For those unfamiliar with the intricacies of the case, this shift might seem like a mere technicality. However, its potential impact on businesses and individuals may be profound. Its implications extend to critical components of business planning, such as buy-sell agreements and life insurance policy ownership. These elements, which were previously structured under the assumption of exclusion from estate valuation, now require meticulous review and potential restructuring.

Estate Tax Implications

Perhaps the most significant change of the Connelly case falls upon the shoulders of wealthy business owners. Suddenly, assets that were once safely tucked away from estate valuation may become subject to substantial estate taxes. This has gotten the attention of CPAs, financial planners, and estate planning professionals alike.

Given the potential implications of the Connelly case, it's important to have a well-thought-out strategy in place. Depending on the valuation and business structure, the impact of the Connelly case could be substantial. Existing buy-sell agreements should be revisited. Amendments may be necessary to ensure that they align with the new developments.

Investor calculating taxes

Collaborative Partnership

Investor and Self-Directed IRA Specialist shaking hands to indicate the good relationship they share.

During times of significant legal change, trust companies typically assume a pivotal role. At Madison Trust, we find that the Directed Trust structure can provide individuals and their advisors with a flexible model that can help them meet their financial and estate planning needs.

The Connelly case serves as a reminder of the fluid nature of the regulatory landscape. For those in the financial sector, including CPAs, financial planners, and estate planning experts, staying well-informed and proactive in the face of such changes is a must. By revisiting existing financial plans, consulting with experts, and embracing collaborative partnerships with trust companies, you can be more prepared to thrive in the shifting financial terrain. Learn more and contact us with any questions you may have.

Disclaimer: All of the information contained on our website is a general discussion for informational purposes only. Madison Trust Company does not provide legal, tax or investment advice. Nothing of the foregoing, or of any other written, electronic, or oral statement or communication by Madison Trust Company or its representatives, is intended to be, or may be relayed as, legal, tax, investment advice, statements, opinions, or predictions. Prior to making any investment decisions, please consult with the appropriate legal, tax, and investment professionals for advice.

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