Buy-Sell Agreements After Connelly: Why Corporate-Owned Life Insurance Just Got More Expensive at Death

What the Court decided

On June 6, 2024, in *Connelly v. United States*, the Supreme Court ruled unanimously that life-insurance proceeds payable to a corporation, earmarked to redeem a deceased shareholder's stock, are a corporate asset that increases the company's fair market value when valuing the decedent's shares. The corporation's contractual obligation to use those proceeds to redeem the shares does not reduce that value.

Justice Thomas wrote for the Court. The holding affirmed the Eighth Circuit and resolved a split with the Eleventh Circuit's earlier, contrary view.

The facts that make the problem concrete

The case involved Crown C Supply, a building-supply company owned by two brothers, Michael and Thomas Connelly. Michael held roughly 77 percent of the shares; Thomas held the rest. The company held a $3.5 million life-insurance policy on each brother to fund a redemption on the first death.

When Michael died, the company received the insurance proceeds and used $3 million of them to redeem his shares. The estate took the position that the company's obligation to pay out those proceeds offset their value — so the proceeds did not inflate the company's worth.

The Court rejected that. The proceeds used for the redemption were a corporate asset in the company's hands. The promise to spend them on a redemption did not make the company worth any less. Counting the proceeds, the company was worth roughly $6.86 million, Michael's stake was valued at about $5.3 million rather than the $3 million reported, and the result was an estate-tax deficiency of approximately $890,000.

Why this reaches ordinary closely held businesses

The entity-redemption buy-sell is one of the most common succession structures in private business. The company owns the policies, collects the proceeds on an owner's death, and buys back the shares. It is administratively simple, it keeps the insurance in one place, and for years it was understood to be value-neutral at death.

*Connelly* removes that last assumption. After this decision, a redemption funded by corporate-owned life insurance creates a circular problem: the insurance raises the company's value, the higher value raises the estate-tax value of the decedent's shares, and there is no offsetting liability to bring it back down. The more insurance, the larger the effect.

This matters most for owners whose estates are near or above the federal exemption — and the exemption is scheduled to fall sharply after 2025, which widens the population of estates exposed to the issue.

The alternative the Court itself flagged

The Court noted, without endorsing any particular plan, that other structures remain available — including the cross-purchase agreement. In a cross-purchase arrangement, the individual owners (or a separate vehicle), not the corporation, own the policies and buy the departing owner's shares directly. Because the proceeds are not a corporate asset, they do not inflate the company's value.

Cross-purchase structures are not free of complications. With more than a couple of owners, the number of policies multiplies. Transfer-for-value rules and the mechanics of insurance ownership require care. Some plans use an insurance LLC or partnership to hold the policies and manage that complexity. The right answer depends on the number of owners, their ages and insurability, and the existing policies in force.

The point is not that cross-purchase is always better. The point is that the default entity-redemption structure now carries a cost it did not visibly carry before, and that cost has to be weighed deliberately.

Key takeaways

• *Connelly v. United States* (June 6, 2024) held unanimously that corporate-owned life insurance used to redeem a deceased owner's shares increases the company's estate-tax value.
• The corporation's obligation to redeem the shares does not offset the proceeds.
• Entity-redemption buy-sell agreements funded by company-owned policies are directly affected; the larger the policy, the larger the estate-tax exposure.
• Cross-purchase structures avoid the problem because the proceeds are not a corporate asset, but they carry their own design considerations.

What to do now

1. Inventory existing buy-sell agreements and the policies funding them.

Identify which agreements use entity redemption and corporate-owned insurance. Those are the ones exposed.

2. Re-run the estate-tax math with the insurance counted.

For owners near the exemption, model the share value with proceeds included — the number may be materially higher than the plan assumed.

3. Evaluate restructuring before the next triggering event.

Cross-purchase conversions, insurance LLCs, and policy ownership changes take time and raise their own tax issues. They cannot be done at the deathbed.

Bottom line

*Connelly* did not outlaw corporate-owned life insurance or entity redemptions. It clarified what they cost at death. For closely held owners with succession plans built on the old assumption, the defensible move is to revisit the structure now — while there is time to choose, not react.