There are three different numbers attached to a business owner's interest when that owner dies. The first is what the buy-sell agreement requires the buyer to pay, whether that buyer is the company or the surviving owners. The second is what the interest is worth for federal estate tax purposes. The third is the net insurance proceeds available to fund the purchase, which is not always the face amount printed on the policy.
Many owners assume these are one number. They were told the agreement was funded, they signed it, and it went in a drawer. In 2024 the Supreme Court decided a case that made the gap between the second number and the other two much easier to see, and a lot of agreements written before then have never been looked at with that gap in mind.
What the Court decided
Two brothers owned a building supply company between them, one holding just over 77% and the other the rest. The company held a $3.5 million policy on each of them so that when one died, it could buy back his shares.
The majority owner died first. Although the agreement contemplated an outside appraisal, nobody obtained one before the redemption. His son and the surviving brother agreed on a price of $3 million instead, and the company used $3 million of the insurance proceeds to redeem the shares.
The estate reported the shares at that $3 million price. During the IRS audit, the surviving brother obtained an outside valuation putting the company at roughly $3.86 million, excluding the $3 million of proceeds used in the redemption. The IRS added those proceeds back, producing a company value of about $6.86 million and a value of about $5.3 million for the deceased brother's stake.
The estate argued that the company's obligation to redeem the shares was a liability that offset the proceeds. In June 2024 the Supreme Court disagreed, unanimously, holding that a corporation's obligation to redeem shares at fair market value did not, merely by existing, offset the life insurance proceeds committed to funding that redemption. Redeeming shares at fair market value doesn't change any shareholder's economic position.
Two things got flattened in a lot of the coverage. The holding is narrow: it concerns how a deceased shareholder's stock is valued for federal estate tax purposes, and it does not rewrite private agreements, does not dictate what a company must pay an estate, and does not instruct private appraisers working under a contract.
And the Court did not say a redemption obligation can never reduce value. It said such obligations are not necessarily liabilities that reduce value, and it noted in a footnote that it wasn't deciding otherwise. An obligation that would force liquidation of operating assets, for instance, might be a different case.
Where the estate tax stands now
Much of the commentary written in 2024 framed this as an estate tax emergency, and reasonably so at the time. The 2024 exclusion was $13.61 million. It rose to $13.99 million in 2025, but the temporary increase was still set to expire after 2025, which would have produced a 2026 exclusion generally expected to land around $7 million.
That didn't happen. Effective January 1, 2026, the federal basic exclusion amount is $15 million per person, indexed for inflation after 2026, with no scheduled sunset under current law. A married couple may potentially use up to $30 million of combined exclusion, assuming both spouses' exclusions remain available. Preserving a deceased spouse's unused exclusion through portability generally requires a timely Form 706, and prior taxable gifts reduce what remains. This discussion covers federal transfer taxes only; state estate and inheritance rules differ.
For owners whose total estates sit comfortably below the threshold, the federal estate tax concern is smaller than it looked two years ago. The three number problem didn't go anywhere.
Why $4 million of insurance doesn't cover $4 million
Start with the number most owners think is settled. Say two partners own a company with an $8 million equity value immediately before death, excluding any death proceeds. They own it equally, the agreement values the interest on an undiscounted pro rata basis, the policies have no material cash surrender value already sitting in that $8 million, and the agreement calls for the company to redeem a deceased owner's interest at fair market value determined at death. Someone did the math at signing: half of $8 million is $4 million, so the company bought $4 million of insurance on each owner.
If the appraisal at death includes the full $4 million of net death proceeds in the company's value, that funding is not close. The company is worth $12 million with the money in hand, and the 50% interest is worth $6 million against $4 million of insurance.
Solving for full funding is where it gets uncomfortable. If the proceeds count toward company value, the insurance needed has to cover half of the company's value plus half of the insurance itself. That only balances at $8 million, twice the policy in place, because every dollar of coverage adds fifty cents to the price it's meant to cover.
The illustration is deliberately clean. Real numbers move with valuation discounts for lack of control or marketability, with any cash surrender value already reflected in the company's pre-death value, and with anything that reduces the usable proceeds. The circularity itself holds whenever the valuation method includes some or all of the company owned death proceeds, and the Court acknowledged exactly this kind of shortfall in Connelly, agreeing that the company there would have needed substantially more insurance than it used.
Whether your agreement has this exact problem depends on how it defines value. That's the question to take to your attorney: does "fair market value" in this document mean the proceeds get counted, or not? The answer comes from the agreement and applicable law, not from Connelly directly. But if nobody has asked, the funding assumption behind the policy amount is worth re-testing.
The other version, where the price is fixed
Some agreements name a dollar figure or use a formula instead. Those may avoid this particular circular problem, if the available proceeds match the contractual price. They can still be underfunded for ordinary reasons, which the checklist further down covers. Their distinct risk is a mismatch between what the agreement pays and what the interest is worth for transfer tax purposes.
Using the same example, if the agreement obligates the company to pay $4 million and the estate tax value of the interest comes in at $6 million, the estate receives $4 million on an interest carrying a higher tax value. Whether any estate tax is owed depends on the size of the estate, prior taxable gifts, and remaining exclusion. And whether $6 million is the right figure depends in part on whether the agreement's price is respected under §2703, Treasury Regulation §20.2031-2(h), and the applicable valuation case law. Section 2703 added requirements. It didn't replace the ones already there, and the 2024 coverage mostly skipped all of it.
Section 2703 of the Code generally says an agreement allowing property to be acquired for less than fair market value is disregarded when valuing that property. There's an exception with three requirements, each of which has to be established independently: the arrangement must be a bona fide business arrangement, it must not be a device to transfer property to the natural objects of the owner's bounty for less than full and adequate consideration, and its terms must be comparable to similar arrangements entered into at arm's length.
The regulations also provide a deemed exception when more than 50% by value is owned by nonfamily parties subject to the same restriction. Note what that does to the example above: a 50/50 agreement between two unrelated partners does not qualify, because exactly half is not more than half. It may still satisfy the three substantive requirements on the facts, but it doesn't get there automatically.
Section 2703 applies to rights and restrictions created or substantially modified after October 8, 1990, so genuinely old agreements may fall under prior law unless they've been changed since. And if an agreement requires periodic price updates, failing to make one is presumed to be a substantial modification unless you can show the update wouldn't have produced one. That presumption can pull an older arrangement under §2703 through inaction, with nothing ever signed. Agreements among family members are not automatically disregarded, and agreements among unrelated owners are not automatically respected. What matters is the agreement's history, the pricing process, whether required updates were made, and the surrounding facts, which makes informal or long-untouched family business agreements particularly worth reviewing, since their pricing and terms may be harder to support under those requirements.
The part that shows up in the financial plan
None of the economics here changed in June 2024. If a fixed-price redemption was going to leave a surviving owner holding the whole company while the deceased owner's family received a set amount, that was true before the decision and after it. What the Court resolved was how the shares get valued for federal estate tax at the moment of death, and that resolution makes a mismatch visible that the parties may never have understood when they signed.
That visibility is the useful part, because the mismatch lands on a surviving spouse who is not in the business, has far less practical leverage than the people still running it, and who often assumed the buy-sell had been handled years ago. If the financial plan assumed the business interest would convert to a particular number for that spouse, and the agreement delivers something materially different, the plan was built on a figure that will not arrive. That gap doesn't appear on any statement. It appears once, and the remedies available afterward are narrower, more expensive, and more adversarial than anything that could have been done in advance.
For siblings who are also partners, there's a second cost. An arrangement that moves several million dollars from one branch of a family to the other, automatically, without anyone intending it, is not a documents problem. It's the kind of unintended result that damages a relationship between two families a decade after the person who could have explained the arrangement is gone.
What to pull out of the drawer
You don't need an appraisal to identify the structural risk. You may need one to quantify it.
Who owns the policies. Company owned insurance funding a company redemption is the one that creates the exposure. In a conventional cross-purchase, proceeds go to the surviving owners rather than to the company, so they don't increase the company's value. A separate insurance entity or trust can reach a similar result, but only if the ownership, beneficiary provisions, economic rights, and governing documents are properly coordinated.
How the price is defined. Fair market value at death, a formula, or a fixed dollar amount. Each has a different failure mode, and the first thing to establish is which one you have and what the document means by it.
When it was last reviewed. Many of these get signed at formation and never reopened. If the company has grown since, the price is likely wrong for ordinary reasons that have nothing to do with any court decision, and the insurance has probably not kept pace either.
Whether the funding was calculated with proceeds included or excluded. One of the most important questions in determining whether the policy amount still works.
What the policy will really pay. The face amount is not always the money available to fund the purchase. Check for policy loans, withdrawals, collateral assignments, a declining death benefit, and whether the policy is performing as illustrated. For company-owned policies issued after August 17, 2006, also confirm that the notice and written consent required under §101(j) were obtained before the policy was issued, since missing that can limit how much of the death benefit is excludable from income and quietly shrink the third number. The annual Form 8925 filing is a separate reporting requirement, and missing it does not by itself make the proceeds taxable. The two get treated as one requirement constantly.
Whether your spouse knows what's in it. Not whether they know it exists. Whether they know what number arrives and when.
The fixes, and what they don't solve
The alternatives are known. A cross-purchase arrangement keeps proceeds outside the company, and the Court itself pointed to it as the structure that would have avoided the issue in Connelly. An insurance LLC or trust arrangement can accomplish something similar without every owner holding a policy on every other owner, which gets administratively cumbersome as the number of owners grows. An existing redemption agreement can sometimes be amended to define the price in a way that accounts for the proceeds explicitly.
None of these is plug and play. Ownership, allocation, transfer provisions, and transfer-for-value rules all need to be structured carefully, and an amendment that clarifies what the estate receives does not by itself establish the value that will be accepted for federal estate tax purposes. That runs through the applicable Treasury regulations, and relevant valuation law.
Matching the three numbers also isn't the complete analysis. The structure drives income tax basis for the surviving owners and whether a redemption gets sale or exchange or dividend treatment, and those can change the economic result materially. Model them before changing an existing arrangement.
Which is the real point. This is a legal question and a tax question and a planning question at the same time, and it tends to get handled as only one of the three. The attorney confirms the agreement is enforceable. The insurance professional confirms the policy is in force. The risk is that nobody has put the three numbers on the same page to see whether they line up. That check is worth doing while everyone involved is alive to talk about it.
Frequently Asked Questions
What did the Supreme Court decide in Connelly v. United States?
In June 2024 the Court held unanimously that life insurance proceeds payable to a corporation increase the corporation's value for federal estate tax purposes, and that an obligation to redeem the deceased shareholder's stock at fair market value did not, merely by existing, offset those proceeds. The holding addresses federal estate tax valuation. It does not rewrite private agreements or determine what a company is contractually required to pay.
Does Connelly still matter now that the exemption is $15 million?
The federal estate tax exposure is smaller for owners whose estates sit below the threshold. Effective January 1, 2026, the basic exclusion amount is $15 million per person, indexed after 2026, with no scheduled sunset under current law. What the case still highlights is a planning question that applies more broadly: the contractual buyout price, the estate tax value of the interest, and the net insurance proceeds available to fund it may be three different numbers, and many agreements were written assuming they were one.
How do I know if my buy-sell agreement has a problem?
Start with who owns the insurance and how the agreement defines the price. Company owned policies funding a company redemption are the structure at issue. From there, whether you face a funding shortfall or a value mismatch depends on whether the price is defined as fair market value at death, as a formula, or as a fixed amount, and on how that term is interpreted under the agreement and applicable law. That interpretation question belongs with your attorney.
What is the difference between a redemption and a cross-purchase agreement?
The difference is who buys. In a redemption the company is the buyer, and in a typical insured redemption it also owns the policies and receives the proceeds. In a cross-purchase the surviving owners are the buyers, and conventionally they own policies on one another and use those proceeds to purchase the interest, which keeps the money outside the company. The Supreme Court identified cross-purchase as the structure that would have avoided the issue in Connelly. It gets administratively cumbersome as the number of owners grows, since each owner needs a policy on every other owner, which is one reason a separate insurance entity or trust is sometimes used instead.
Does a fixed price in the agreement control the estate tax value?
Not automatically. Section 2703 generally disregards an agreement permitting property to be acquired below fair market value unless three requirements are each established: the arrangement is a bona fide business arrangement, it is not a device to transfer property to the natural objects of the owner's bounty for less than full and adequate consideration, and its terms are comparable to similar arm's length arrangements. The regulations also deem the requirements met when more than 50% by value is owned by nonfamily parties subject to the same restriction, which an exactly even split between two unrelated partners does not reach. Section 2703 applies to rights and restrictions created or substantially modified after October 8, 1990, and skipping a price update the agreement requires can itself count as a substantial modification.
Does this apply to LLCs and partnerships?
Connelly involved a corporation and the Court decided the valuation of corporate shares. The reasoning may be relevant where entity owned insurance proceeds increase the value of a partnership or LLC interest, but that requires a separate analysis of the entity documents, the applicable tax rules, and governing law rather than an assumption that the result carries over.
How often should a buy-sell agreement be reviewed?
Every few years, and any time the business changes materially. Growth, a new owner, a change in entity structure, or a meaningful shift in profitability all affect whether the price and the funding still line up. Most agreements are signed at formation and never reopened, which is how a document written for a much smaller company ends up governing a much larger one.
Related Reading
- What Your Business Is Worth and What You'll Keep Are Two Different Numbers
- Estate Planning Before a Business Sale: The Tax Is the Easy Part
- Succession Planning for Family Businesses: When to Start and What Drives the Outcome
- The Architecture of Inheritance
This content is for educational purposes only and does not constitute legal, tax, or investment advice. Buy-sell structures depend on entity type, ownership composition, the specific terms of the governing documents, and applicable state law. Consult a qualified attorney, tax advisor, and insurance professional before making changes to an existing agreement.
