Connelly v. United States is a 2023 legal case that involved the valuation of business shares in a buy-sell agreement.
The case upended several longstanding precedents and highlighted new legal considerations for buy-sell agreements.
While the case awaits final judgement from the Supreme Court, business owners should note several important takeaways.
Owners are encouraged to consult experienced professionals for specific guidance.
- A buy-sell agreement should have a clear valuation mechanism.
- A valuation or formula should be approved annually and memorialized in the corporate minutes.
- An agreement should be effective during life and at death.
- The funding vehicle should not be owned by the company, as the court ruled that corporate-owned insurance proceeds can increase the company’s value for tax purposes. This creates a discrepancy between the entity’s taxable value and its transfer value. It also invites potential litigation by departing partners or heirs, who may claim they are entitled to the difference.
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