Thursday, November 03, 2005

Buy-Out Insurance Owned by Corporation Does Not Increase Estate Tax Values

To provide liquidity to a decedent's estate, or to provide for succession of ownership, buy-sell agreements are often entered into obligating a corporation to buy the stock of a major stockholder at the death of that stockholder. This purchase obligation is often funded by the corporation purchasing a life insurance policy on the life of the shareholder. That way, when the shareholder dies, the corporation receives the life insurance proceeds and thus has the cash to purchase the stock.

Since the estate of the decedent shareholder is subject to estate tax based on the value of the stock, the question arises whether the value of the stock (which is based on the value of the assets of the corporation) should be increased to account for the life insurance proceeds payable to the corporation. There has been case law to the effect that such insurance is NOT included in the valuation computation, but in a recent case the Tax Court ruled that the insurance proceeds should be counted in determining the value of the corporation (and the stock of the decedent stockholder).

In a ruling favorable to taxpayers, the U.S. Eleventh Circuit Court of Appeals reversed the Tax Court and held that the insurance proceeds should not be taken into account. The Court noted that the value of the insurance payout was offset by the obligation of the corporation to purchase the shares, and thus should not impact valuation of the company or the shares. Estate of Blount v. Comm., 96 AFTR 2d 2005-XXXX, (10/31/2005 CA11).
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