Category Archives: Business Law

The 2026 “Dynastic Wealth” Bill:

Why Estates Between 3.5 and 15 Million Are Squarely in the Crosshairs of this Proposed Legislation

In March 2026, Democratic Senator Chris Van Hollen introduced S. 4196, the Strengthen Social Security by Taxing Dynastic Wealth Act, a proposal that would dramatically reset federal estate and gift taxes starting in 2027. While the bill is often described as targeting “ultra‑wealthy” families, the most immediate impact would fall on estates in roughly the 3.5–15 million per‑person range; families who are affluent but not necessarily thinking of themselves as “dynastic.”

For these households, the key planning question is not just what the bill does, but when. The timing of the proposed changes creates a powerful, but time‑limited, opportunity to act before the end of 2026.

Where We Are Today: Historically High Exemptions Through 2026

Under current law, the lifetime federal estate and gift tax exemption for 2026 is projected to be about 15 million per person, or 30 million for a married couple, with a top transfer‑tax rate of 40%. That means many well-off families, especially those with estates between 3.5 and 15 million per person, are outside the reach of federal estate tax entirely.

These historically high exemption levels are scheduled to stay in place through December 31, 2026, under current law. For planning purposes, this gives clients one more year where very large lifetime gifts can be made without triggering federal transfer tax, so long as those transfers are completed before year‑end 2026.

What S. 4196 Would Do Starting in 2027

S. 4196 would essentially turn the clock back to the 2009 transfer‑tax regime and redirect the resulting revenue into Social Security. The core changes are straightforward but severe for upper‑middle‑market estates.

• Estate tax exemption reset: The federal estate tax exclusion would drop to 3.5 million per individual (7 million for a married couple), with a top rate of 45%.
• Gift tax decoupled and capped: The unified structure would be broken; lifetime gifts would receive only a 1 million exemption for gift‑tax credit purposes.
• Effective date: These new rules would apply to estates of decedents dying and gifts made after December 31, 2026.

For families with net worth between roughly 3.5 and 15 million per person, the difference is dramatic: an estate that today would pass free of federal tax could face a sizable 45% estate tax on amounts exceeding the new 3.5 million threshold if S. 4196 becomes law.

The “Use It or Lose It” Window: Why 2026 Is Critical

One of the most important features of S. 4196 is what it does not do: it does not claw back valid large gifts made in 2026 under today’s elevated exemption. Large lifetime transfers completed before January 1, 2027 can still use the current 15 million per‑person unified credit, even though future gifts would be capped at 1 million.

In practice, this sets up a two‑stage planning framework:

• Stage 1 – Before December 31, 2026:
  Families can make substantial gifts, often into irrevocable trusts, using the current high exemption, removing future appreciation from their taxable estates while incurring no immediate transfer tax.
• Stage 2 – After December 31, 2026:
  Assuming S. 4196 or a similar regime is in effect, only a 1 million lifetime gift exemption remains for fine‑tuning, not for large transfers. At death, everything above the 3.5 million estate exemption per person is exposed to estate tax at rates up to 45%.

For an estate in the 10 million range, the difference between fully using the 2026 exemption versus doing nothing could be measured in millions of dollars of estate tax under the proposed rules.

Why the 3.5–15 Million Range Is So Exposed

Families above about 15 million per person are already planning around federal estate tax and typically have sophisticated structures in place. By contrast, households in the 3.5–15 million band often assume they will stay below any realistic federal estate‑tax threshold and may not have done extensive transfer‑tax planning.

S. 4196 changes that calculus overnight:

• • Estates between 3.5 and 15 million per person, which are untaxed today, become fully taxable above the 3.5 million mark.
  • Closely held business interests, operating companies, ranches, and real estate portfolios that were never modeled for federal estate tax could suddenly need liquidity solutions to pay a 45% tax on value above the exemption.
  • Because the proposal dedicates all estate, gift, and generation‑skipping transfer tax revenue to a unified Social Security Trust Fund, those taxes may become politically harder to roll back in the future.

In other words, this is the group most likely to be caught by surprise, unless they make proactive use of the 2026 planning window.

The New Gifting Landscape After 2026

The shift from a 15 million unified exemption to a 1 million lifetime gift cap fundamentally changes how gifting will work if S. 4196 passes.

Under today’s rules, a client can gradually or in one stroke shift tens of millions of dollars out of the taxable estate using the unified credit, relying on techniques like spousal lifetime access trusts (SLATs), dynasty trusts, and transfers of discounted entity interests. After 2026, the gift exemption would mainly serve as a tool for incremental clean‑up transfers, not for major wealth shifts.

That makes 2026 the decisive year for clients who want to:

• Move high‑growth assets, such as operating businesses, ranch or mineral interests, or concentrated equity positions, out of the taxable estate while values are still within the current high exemption; and
• Lock in today’s rules before the combination of a 3.5 million estate cap and a 1 million gift cap sharply limits what can be done later without incurring tax.

Advisors are already encouraging clients to treat 2026 as a rare “last call” moment for large‑scale lifetime planning.

What To Do Now

S. 4196 is still proposed legislation and may change, but it reflects a clear policy direction: lower exemptions, higher transfer‑tax burdens, and a tighter link between those taxes and Social Security funding. For families in the 3.5–15 million per‑person range, ignoring that direction could be costly.

Practical next steps include:

• Updating personal balance sheets and entity diagrams to understand current net worth and trajectory.
• Modeling estate‑tax exposure under both today’s rules and a 3.5 million / 45% S. 4196 regime.
• Identifying high‑appreciation assets that are strong candidates for 2026 lifetime gifts.
• Coordinating with legal, tax, and financial advisors to implement a gifting plan well before December 31, 2026.

The window is open now, but if S. 4196 moves forward and becomes law, that window closes at midnight on December 31, 2026.

While this proposed law may or may not become final, don’t wait to build appropriate estate planning, trust, and gifting strategies for your family. It’s essential to consult with an experienced estate planning attorney to determine the best approach for your specific circumstances and ensure your estate planning documents are properly prepared and legally sound. Mr. Michael A. Weaver, Partner at Saunders | Walsh, specializes in estate planning law and looks forward to working with your family to protect your legacy assets. Call us today to schedule your consultation with Mr. Weaver.

Funding Buy-Sell Agreements with Life Insurance
After Connelly v. United States

For closely held businesses, a well-drafted, properly funded buy-sell agreement is one of the most important—and most frequently mishandled—estate planning tools. A buy-sell sets the rules of engagement for what happens to an owner’s interest at death, disability, or departure and, when paired with life insurance, can provide the liquidity needed to keep the business and the family both financially secure.

But the Supreme Court’s decision in Connelly v. United States is a stark reminder that how you structure and fund that agreement can dramatically change the estate tax result. A buy-sell that looks fine from a corporate or succession-planning perspective can actually increase the taxable estate if the insurance and ownership mechanics are not carefully aligned with the valuation rules of the Internal Revenue Code.

Why Life Insurance Is the Workhorse Funding Vehicle

Most owners like the concept of a buy-sell agreement in theory. The friction usually arises around the question: “Where does the money come from to actually buy the deceased owner’s interest?”

Life insurance solves that problem elegantly:

• • • It creates immediate, liquid cash at the exact time it is needed; upon an owner’s death.
    • It avoids forcing the company or the surviving owners to borrow on unfavorable terms or fire-sale assets just to complete the buyout.
    • It converts an illiquid business interest into cash for the deceased owner’s family, which is often far more useful for a surviving spouse or heirs who are not involved in the business.

In short, insurance is not the agreement; it is the funding engine that allows the agreement to work under real-world stress. The legal and tax consequences, however, depend critically on who owns the policy, who is the beneficiary, and how the buy-sell is drafted.

Common Structures: Cross-Purchase vs. Entity Redemption

Although there are hybrids and variations, most life-insurance-funded buy-sell plans fall into one of two basic models: cross-purchase or entity redemption (entity purchase). Each has distinct ownership, tax, and administrative implications.

Cross-Purchase Structure

Under a cross-purchase arrangement:

• • • Each owner buys and owns a policy on the life of the other owner(s).
    • When an owner dies, the surviving owner(s) collect the death benefit personally and use it to purchase the deceased owner’s shares under the buy-sell agreement.
    • The surviving owners receive a basis step-up in the shares they purchased, which can be valuable if the business is later sold.

Advantages:

• • The insurance proceeds never sit inside the company itself, so they generally are not building the value of the corporation for estate tax purposes.
  • Surviving owners individually acquire more stock with a higher basis, which may reduce future capital gains on a sale.

Challenges:

• • • With more than a few owners, the number of policies required can become unwieldy (each owner needs policies on each of the others).
    • Premiums may not be perfectly “equal” if there are big age or health differences among owners.

Entity Redemption Structure

Under an entity redemption:

• • • The company owns policies on each owner’s life and is the beneficiary of those policies.
    • When an owner dies, the company receives the death benefit and uses those funds to redeem (buy back) the deceased owner’s shares under the buy-sell agreement.
    • The remaining owners’ percentage interests increase, but their tax basis in their shares does not.

Advantages:

• • • Administrative simplicity: the entity owns one policy per owner, pays the premiums, and handles any changes centrally.
    • Often easier to explain and implement for larger ownership groups.

Risks:

• • • Because the insurance proceeds are received by the entity, they increase the value of the company itself, which becomes a central issue for estate tax valuation.
    • If the agreement is not drafted and operated within the strict requirements of the valuation rules, the tax results can be far worse than expected.

The Connelly decision squarely focused on this entity-redemption model.

The Connelly Case: When the Insurance Creates the Tax Problem

In Connelly v. United States, the Supreme Court reviewed an estate tax dispute arising from a family-owned corporation that used a redemption-style buy-sell agreement funded with corporate-owned life insurance. The key facts, simplified:

• • • The corporation owned a life insurance policy on a shareholder’s life and was the beneficiary.
    • The buy-sell agreement provided that on a shareholder’s death, the corporation would redeem the deceased shareholder’s stock using the insurance proceeds.
    • For estate tax purposes, the estate argued that the corporate-owned life insurance should effectively be ignored or offset by the corresponding obligation to redeem the shares; i.e., that the insurance did not increase the value of the corporation for valuation purposes.

The Supreme Court rejected that argument. The Court held that:

1. 1. The life insurance proceeds received by the corporation are a valuable corporate asset that must be included in the fair market value of the company when determining the value of the decedent’s stock for estate tax purposes.
   2. The corporation’s contractual obligation to redeem the decedent’s shares does not reduce the value of the corporation in that valuation exercise. A redemption obligation is essentially an arrangement among shareholders, not a corporate liability that diminishes enterprise value in the eyes of a hypothetical willing buyer.

The result was harsh: the insurance increased the company’s value for estate tax purposes, thereby increasing the value of the decedent’s shares, even though those same insurance dollars were earmarked to redeem those shares. The estate ended up paying estate tax on a higher value while the actual economic benefit to the family did not increase proportionately.

In addition, the Court and the IRS looked closely at the buy-sell agreement itself. The agreement failed to meet the requirements under Internal Revenue Code Section 2703 for an agreement to control value for estate tax purposes:

• • • The agreement did not operate as a true, binding arm’s-length arrangement;
    • It was not consistently observed in practice; and
    • It did not provide a fixed or formula-based price that would be respected for valuation purposes.

Because the agreement was not respected as a bona fide price-setting mechanism, the IRS and the Court fell back to general fair market value principles, which included the insurance proceeds at full value.

The Estate Tax Risk of “Wrong” Structure

The lesson from Connelly is not that entity-redemption agreements are dead, but that they are dangerous if you assume the life insurance funding will be tax neutral at the corporate level.

The core estate tax risks include:

• • • Inflated Estate Value: When the corporation owns the policies, the death proceeds can significantly increase the company’s value at the moment of death, directly increasing the decedent’s taxable estate.
    • No Offset for Redemption Obligation: A contractual requirement for the company to redeem shares using those same proceeds typically will not reduce the corporate value for estate tax purposes. The estate may feel like the insurance “just passes through,” but for valuation purposes it is effectively an asset that boosts the company’s worth.
    • Unrespected Buy-Sell Price: If the agreement’s price mechanism is not carefully drafted, regularly updated, and actually followed, the IRS may disregard the stated price and instead use a higher fair market value, including the insurance.
    • Mismatch Between Economic and Tax Outcomes: The family may end up with the same economic result they always expected (cash for shares, surviving owners with 100% of the company), but with a significantly larger estate tax bill, reducing the net value transferred to heirs.

For closely held businesses where the business interest is the primary asset in the estate, that mismatch can be catastrophic.

Drafting and Structuring After Connelly: Practical Guidelines

Attorneys and advisors can still use life insurance to fund buy-sell agreements effectively, but the post-Connelly environment calls for more precision in structure and documentation.

1. 1. Be Intentional About Policy Ownership

Consider whether corporate ownership of the policies is truly necessary, or whether a cross-purchase or alternative structure (such as a separate LLC or trust to own policies) can achieve the same funding benefits with less estate tax exposure.

• • • For two or three owners, a traditional cross-purchase is often manageable and may keep the insurance proceeds out of the entity’s value.
    • For larger groups, look at techniques that centralize policy ownership outside the operating company rather than inside it.

1. 2. Tighten the Buy-Sell Agreement Under Section 2703

If you want the buy-sell to influence or control the value used for estate tax purposes, it must be drafted to meet the statutory and regulatory requirements:

• • • Use a clear, objective price mechanism (such as a regularly updated formula tied to earnings, EBITDA multiples, or independent appraisals) rather than vague or ignored valuation language.
    • Require periodic updates to the stated value or formula and document those updates; then actually transact at those values when triggering events occur.
    • Ensure the agreement is binding on the parties both during life and at death, and that it resembles an arm’s-length arrangement rather than a device to artificially depress estate values.

1. 3. Coordinate Insurance, Valuation, and Corporate Records

The buy-sell agreement, the insurance policies, and the corporate records (minutes, cap table, financial statements) must tell a consistent story:

• • • Confirm that policy ownership and beneficiary designations match the structure described in the buy-sell.
    • Ensure that financial statements properly reflect corporate-owned policies and that appraisers understand the treatment of those policies under current law.
    • Revisit both the agreement and coverage amounts as the business value changes; an outdated policy or stale valuation can be as dangerous as no planning at all.

1. 4. Model the Estate Tax Outcomes in Advance

For key owners, it is prudent to model:

• • • The projected value of the business with and without insurance proceeds at death.
    • The resulting estate tax liability under different structures (cross-purchase vs. entity redemption vs. external policy-owning entities).
    • The net amounts expected to pass to family members after tax under each approach.

These projections help owners understand that “simpler” is not always safer and that the short-term convenience of entity-owned policies may carry long-term estate tax cost.

Takeaways for Business Owners and Advisors

Life-insurance-funded buy-sell agreements remain a powerful way to combine business succession and estate planning. They provide liquidity when it is needed most and can prevent families from being forced into bad deals or litigation in the wake of an owner’s death.

The Connelly decision, however, is a reminder that the tax law does not always align with intuitive economics. When the entity owns the life insurance and is the beneficiary, those proceeds may increase the value of the decedent’s stock for estate tax purposes, even if they are immediately used to redeem that stock under a buy-sell agreement. If the agreement itself is not drafted and operated to meet strict valuation requirements, the IRS and the courts may ignore the nominal “buy-sell price” and impose tax on a significantly higher value.

For that reason, buy-sell agreements should be reviewed not only through a corporate or transactional lens, but through an estate tax lens. Aligning the structure (cross-purchase vs. entity redemption vs. alternative ownership vehicles), the insurance funding, and the valuation mechanics is essential to avoid turning what was intended as a tax-efficient succession plan into an estate tax trap.

If you have an existing buy-sell agreement funded with life insurance—especially if the corporation owns the policies—this is an excellent time to have it reviewed in light of Connelly and to confirm that the structure will produce the estate tax result you actually intend. Mr. Michael A. Weaver, Partner at Saunders | Walsh, specializes in estate planning and corporate law and looks forward to working with you to build buy-sell provisions in your Company Agreement that work. Call us today to schedule your consultation with Mr. Weaver.