Business · 5 min read
Buy-sell agreements after Connelly (2024)
How co-owners plan for a death or exit, the main ways to fund it with life insurance, and what the 2024 Supreme Court case changed.
Pillar: Business · Reading time: 5 min
In plain words
If you own a business with someone else, one of you will leave first: by death, disability, retirement or a falling out. A buy-sell agreement is a contract, signed in advance, that says who buys the departing owner's share, at what price and how it will be paid for.
Without one, a surviving owner can end up in business with a spouse or heirs who never wanted to run it. The family, in turn, may own a share they cannot sell at a fair price. A buy-sell gives both sides a plan. Life insurance is the most common way to fund it, because it pays cash at the exact moment it is needed.
The main structures
Entity redemption (stock redemption)
The company itself owns a policy on each owner and agrees to buy back a deceased owner's shares. - Pros: one policy per owner, simple to manage, premiums paid by the business. - Cons: survivors do not get a stepped-up cost basis on the shares they effectively gain. After Connelly, the proceeds can raise the company's value for estate tax (see below).
Cross-purchase
Each owner owns a policy on each other owner, and the survivors buy the shares directly. - Pros: survivors get a higher cost basis on the shares they buy, which can lower capital-gains tax if they later sell. The proceeds are not company assets, so Connelly's issue does not arise. - Cons: the number of policies grows fast. Four owners need twelve policies. Owners of different ages pay very different premiums.
Trusteed or LLC cross-purchase
A trustee or a separate LLC owns one policy per owner and carries out the purchase for the survivors. - Pros: keeps cross-purchase tax results with only one policy per owner, and a neutral party handles the deal. - Cons: more legal setup and ongoing cost. The structure must be drafted carefully to avoid problems with transfer-for-value rules and partnership tax rules.
Wait-and-see
The agreement leaves the choice of entity or cross-purchase open until an owner dies. It adds flexibility, at the cost of complexity.
What Connelly changed
In June 2024, the U.S. Supreme Court decided Connelly v. United States. Two brothers owned a company that held life insurance to redeem a deceased brother's shares. When one died, the estate argued that the company's duty to buy back the shares offset the insurance money it received.
The Court disagreed. Under current U.S. federal law, it held that: - life insurance proceeds the company receives count in the company's fair market value for estate tax; and - the company's obligation to redeem the shares does not reduce that value.
The practical result: in an entity-redemption plan, the insurance meant to fund the buyout can push up the value of the deceased owner's shares, and therefore the estate tax. For estates below the federal exemption ($15 million per person for 2026, indexed), this may not create a tax bill, but it can still matter for state estate taxes and for fairness between owners.
What owners are doing now
- Reviewing entity-redemption plans, especially where an owner's estate is near or above the exemption.
- Moving to cross-purchase or a trusteed/LLC structure, so the policies sit outside the company. Moving existing policies must respect transfer-for-value rules; transfers to partners or partnerships of the insured, or to the insured, are generally excepted.
- Updating the valuation clause, so the price formula clearly says whether insurance proceeds count.
- Getting a current valuation. A stale agreed price is one of the oldest buy-sell problems.
A worked example (illustrative)
Rosa and Ben, 52 and 49, each own 50% of a distribution company worth about $6 million before insurance. Their old agreement is an entity redemption, funded by $3 million of company-owned cover on each.
If Rosa dies, after Connelly the company's value for estate tax is $6 million plus the $3 million of proceeds, $9 million in all. Rosa's 50% is valued at $4.5 million, while her family receives $3 million for it. With her other assets, that higher value pushes her estate closer to the exemption.
| Entity redemption | Cross-purchase | |
|---|---|---|
| Policies | 2, company-owned | 2, owner-owned |
| Rosa's share for estate tax | about $4.5M | about $3M |
| Ben's new cost basis | unchanged | up by $3M |
With an attorney, they move to a cross-purchase: each owns a $3 million policy on the other. The figures are simplified and illustrative, not legal or tax advice.
Common mistakes
- No agreement at all. Families and survivors then negotiate in the worst week of their lives.
- An out-of-date price. Many agreements carry a value set years ago and never revised.
- Unfunded promises. A buy-sell without insurance or a funding plan often means a long, risky payment plan.
- Ignoring disability. Owners are more likely to be disabled than to die before retirement; disability buy-out cover exists.
- Leaving entity plans unchanged after Connelly. Review with an attorney and tax professional.
FAQs
Does Connelly affect cross-purchase plans?
Not directly. In a cross-purchase the policies are owned by the owners, not the company, so the proceeds do not enter the company's value.
Is term or permanent insurance better for a buy-sell?
Term fits owners who plan to exit by a known date. Permanent cover fits owners who expect to stay until death, and its cash value can help fund a lifetime buyout.
Can we use an ILIT instead?
An ILIT holds personal cover for estate liquidity; it is not usually the buyer under a buy-sell. Some families use both, for different jobs.
How often should we update the agreement?
Review the value and cover every year or two, and after any big change in the business.
Who should draft it?
A business attorney, with a tax professional.
Related strategies
- Key person insurance — protecting operations, not ownership.
- Passing a family business on — the succession plan around the buy-sell.
- ILITs explained — keeping personal cover outside your estate.
Next step
Get a quote at /quote to see an illustrative cost of funding your buy-sell, then review the structure with your attorney.
Education only, not personal financial, tax, legal or insurance advice. VeraLife.ai is not a registered investment adviser, broker-dealer or insurance agency. All numbers are illustrative.