Supreme Court Shakes Up Estate Planning: How Recent Decisions Are Changing Your Tax Strategy

The landscape of estate and gift tax planning has experienced significant shifts in 2024, with the Supreme Court delivering a unanimous decision that fundamentally alters how closely-held businesses must approach estate tax valuations. Combined with ongoing uncertainty about the future of federal exemption amounts, these developments demand immediate attention from anyone engaged in comprehensive estate planning.

The Connelly Decision: A Game-Changer for Business Owners

In June 2024, the Supreme Court issued its unanimous ruling in Connelly v. United States, addressing whether life-insurance proceeds that will be used to redeem a decedent’s shares must be included when calculating the value of those shares for purposes of the federal estate tax. The Court’s answer was a resounding yes, creating immediate implications for thousands of closely-held businesses across the country.

The case involved Michael and Thomas Connelly, the sole shareholders of Crown C Supply, who had an agreement that the corporation would redeem a deceased shareholder’s shares using company-owned life insurance. When Michael passed away, the business used the life insurance proceeds to buy out Michael’s share of the company. Michael’s estate did not include the value of the life insurance proceeds in the calculation of the company’s value included in his estate, arguing that the value was offset by the company’s obligation to redeem the estate’s shares.

The Supreme Court, in a unanimous decision, ruled that the proceeds from the life insurance policy used to buy out the deceased owner’s share of the business were not offset by the redemption obligation. Thus, after the death of a shareholder, the value of that person’s shares must reflect the corporation’s fair market value, including insurance proceeds meant to fund a share redemption.

Practical Impact on Estate Planning Strategies

For businesses, especially closely held entities, this decision underscores the importance of understanding how life insurance proceeds used for share redemptions are treated for estate tax purposes. In certain situations, this answer could decrease the amount passed to your heirs by up to 40% of the total life insurance proceeds.

For estate tax planning purposes, this case will affect a greater number of taxpayers if the lifetime exemption from estate taxes is reduced from $13.61 million to roughly $7 million per person in 2026, as it is set to do. Because a person’s taxable estate includes such a broad range of property interests, a $7 million estate is a reasonably attainable figure for many middle-class American business owners.

The Looming 2026 Exemption Cliff

The impending sunset of the current estate, gift, and generation-skipping transfer (GST) tax exemptions at the end of 2025 is a critical issue for estate planners and their clients. The Gift and Estate Tax Exclusion is currently scheduled to be reduced by approximately 50% in about 13 months. Without action from Congress, on January 1, 2026, the Exclusion will go from almost $14 million to about $7 million.

If you give gifts before the reduction and die after the reduction, you can still take advantage of the higher Exclusion. For example, if you give away $10 million in 2024 and the Exclusion is reduced to $7 million in 2026, your exemption amount is not clawed back for the year 2024. You still get to exempt the entire $10 million gift amount, but your Exclusion remaining after that would be reduced to zero.

Strategic Responses for Today’s Environment

Given these developments, families and business owners should consider several immediate planning opportunities. We recommend that business owners collaborate with their professional advisors to review existing buy-sell agreements and verify that they are structured with tax implications in mind. The structure of these agreements can significantly impact the business’s valuation for estate tax purposes. Consider alternative buy/sell structures, such as cross-purchase agreements, when a limited number of owners exist to avoid the potential inclusion of life insurance benefits in the business’s valuation.

The Gift Tax Exclusion Amount will increase from $18,000 to $19,000 in 2025 (a combined $38,000 for married couples), providing additional opportunities for tax-free wealth transfer through annual gifting strategies.

Why Professional Guidance Is Essential

These recent Supreme Court decisions and changing tax landscape underscore the complexity of modern estate law. The interplay between business valuation rules, federal exemption amounts, and state-specific regulations requires sophisticated analysis and strategic planning.

The Connelly case reinforces that tax planning for closely held companies (and their shareholders) is not always straightforward. Most estate plans will not end up in the Supreme Court, but companies and shareholders should plan ahead with competent professionals to avoid surprises.

For Long Island families and business owners, working with experienced estate planning attorneys who understand both the recent legal developments and local considerations is more important than ever. The window for utilizing current higher exemption amounts is closing rapidly, and the Connelly decision has fundamentally altered the risk profile for many business succession plans.

Planners should strongly advise their clients of these potential liabilities when accepting a fiduciary role and encourage waiting for an IRS closing letter before distributing estate assets. The stakes have never been higher, and the time for action is now.