Connelly v. United States: What Business Attorneys Should Revisit in Existing Buy-Sell Agreements
An educational resource on the Supreme Court’s June 6, 2024 decision and what it may mean for insurance-funded buy-sell agreements your firm has already drafted.
A Summary of Connelly v. United States
Two brothers owned a closely held corporation. To fund the required redemption of a deceased owner’s shares, the corporation owned a life insurance policy on each brother. When one brother died, the corporation received the proceeds and used them to redeem his shares.
The Supreme Court held that the corporation’s obligation to redeem the shares did not offset the life insurance proceeds when valuing the company for federal estate-tax purposes. The proceeds increased the corporation’s value — and therefore the taxable value of the deceased owner’s shares. In that case, the IRS valued the shares roughly $2.3 million higher than the family had agreed, resulting in about $889,914 in additional estate tax.
The decision does not invalidate entity-purchase agreements or require every agreement to be restructured. Its consequences depend on each arrangement’s facts and circumstances.
Primary sources
This page is educational and is not legal or tax advice. Attorneys should evaluate the decision’s application to each client’s circumstances.
How Entity-Purchase Agreements Are Commonly Funded
In an entity-purchase (redemption) arrangement, the business itself agrees to buy a deceased or departing owner’s interest. The business often owns life insurance on each owner so that, at death, proceeds provide the liquidity to complete the purchase.
Before Connelly, many practitioners assumed the redemption obligation would offset the insurance proceeds in the company’s value. The Court rejected that offset for federal estate-tax purposes, which can leave the taxable value of a deceased owner’s shares higher than expected.
Cross-Purchase vs. Entity-Purchase Considerations
In a cross-purchase arrangement, the remaining owners — not the business — buy the interest, typically with policies they own on each other. Connelly’s holding addressed corporate-owned insurance in a redemption structure; it did not hold that cross-purchase arrangements eliminate all tax concerns.
Neither structure is appropriate for every client. Ownership count, premium economics, basis treatment, and creditor considerations all differ. The choice belongs with the client’s attorney and tax advisor — our role is to make sure the funding side of whichever structure exists actually works.
Agreements That May Deserve Review
- Entity-purchase agreements funded with corporate-owned life insurance
- Agreements with fixed or formula values set more than a few years ago
- Agreements where insurance coverage has not kept pace with business value
- Arrangements where policy ownership, beneficiaries, or premium payors have changed
- Plans affected by ownership, family, debt, or succession changes since signing
Questions Attorneys Should Ask
- Who owns the life insurance funding the agreement, and who is the beneficiary?
- How would policy proceeds be treated in the company’s value for estate-tax purposes?
- Does the redemption obligation reduce the company’s value under current law?
- Is the stated or formula value still defensible against the business’s current value?
- Would the existing funding complete the intended ownership transfer today?
A Practical Starting Point
A concise checklist for identifying possible valuation and funding concerns in an existing agreement.
- Confirm the agreement’s purchase structure (entity-purchase, cross-purchase, or hybrid)
- Identify each policy’s owner, beneficiary, insured, and coverage amount
- Compare total coverage with the estimated current buyout obligation
- Review how the agreement sets value and when it was last updated
- Flag entity-purchase arrangements with corporate-owned insurance for legal and tax review
- Document ownership, family, or financing changes since the agreement was signed
A printable version is available in our resources library.
Financial Analysis. Attorney-First Reporting.
Buy Sell Advisory coordinates the financial side of the review: an informal business valuation, an insurance funding-gap assessment, and identification of arrangements where corporate-owned life insurance may warrant additional legal and tax analysis.
Findings go to your firm first. We do not contact your client directly without your approval, and legal analysis and recommendations remain with your firm.
Discuss a Client’s Buy-Sell Funding ArrangementOwnership Changes. Business Values Change. Your Buy-Sell Planning Should Keep Up.
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