Does a stock redemption obligation offset company life insurance for estate tax?

Why the redemption obligation does not reduce the value

Courts rejected the buy-sell obligation as an offset because a hypothetical third-party buyer would value the company including the life insurance proceeds.

The Supreme Court affirmed that a corporation's contractual obligation to redeem shares is not necessarily a liability that reduces its value for federal estate tax. The parties agreed that life insurance proceeds payable to a corporation increase its fair market value.

A fair-market-value redemption obligation also did not reduce a shareholder's economic interest to offset proceeds treated as a company asset. The ruling concerned the value of a deceased shareholder's shares for federal estate tax.

What the holding leaves open

Practitioners note that the Court did not hold that a redemption agreement can never reduce corporate value. The Court rejected the proposition that any redemption obligation does so.

How practitioners describe the effect on owners

Practitioners describe the holding as applying to life insurance proceeds that a closely held corporation receives at an owner's death.

A closely held corporation that owns a policy on a shareholder and uses the proceeds to redeem that shareholder's shares matches the setup the Supreme Court addressed.

Other practitioner summaries make two related points about the same holding.

• Practitioners describe corporate life insurance proceeds as increasing the company's date-of-death value.
• The redemption obligation was not treated as a liability that offset the insurance proceeds in valuing the shares.

Common questions