PODCAST | The Decision in Connelly vs. United States May Increase Estate Tax Obligations

In this Gorfine, Schiller & Gardyn podcast episode, Chuck Faunce, Director of Business Valuation and Litigation Services at GSG, breaks down the implications of the recent Supreme Court decision in Connelly vs. United States, and why it could significantly increase estate tax obligations for closely held business owners.

The Connelly decision clarified that a company’s contractual obligation to redeem shares at fair market value does not reduce the value of those shares when calculating estate taxes. This marks a major departure from previous interpretations, which allowed estate valuations to be reduced by the value of redemption obligations, thus lowering potential tax liabilities.

In the interview, Chuck explains why characterizing redemption obligations as temporary equity, rather than liabilities, is essential to reflect the true economic picture of a business. He also outlines the risks of mischaracterization and what proactive steps business owners should consider in light of the ruling.

Following are highlights from this insightful discussion:

• The Supreme Court’s core decision in Connelly and how it departs from prior practices. (:28)
• How this ruling may lead to higher estate tax obligations for estates holding redeemable shares in closely held companies. (:53)
• Why proper classification of redemption obligations as temporary equity is critical in estate valuations. (2:00)
• How misclassifying redemption obligations as liabilities can create misleading perceptions of gain for remaining shareholders. (2:53)
• Practical steps for business owners with life insurance-funded buy-sell agreements to avoid unintended tax consequences. (4:07)
• Whether further guidance or legislative changes are likely in the wake of Connelly. (5:27)

We’d like to thank Chuck for sharing his expertise on this important development in estate and valuation planning and creating a white paper for a deeper dive.

To learn more, please download GSG’s white paper that provides detailed analysis around the effect of redemption obligations on the value of privately held business equity owners’ economic interest here.