Business owners
The Supreme Court Changed Buy-Sell Insurance in 2024. Most Agreements Still Have the Old Structure
A company bought insurance on its owners so it could buy out a family that lost one. The Court held the insurance money counted toward what the company was worth — and the buyout obligation did not cancel it.
By Caleb Bullard · · 8 min read
The short answer. On June 6, 2024, in Connelly v. United States, the Supreme Court held that "Life-insurance proceeds payable to a corporation are an asset that increases the corporation's fair market value," and that "A corporation's contractual obligation to redeem shares is not necessarily a liability that reduces a corporation's value for purposes of the federal estate tax." The practical effect: with a redemption-style buy-sell funded by company-owned life insurance, the proceeds can raise the value of the deceased owner's shares for estate tax, even though the same money is being paid out to buy those shares. The Court noted that under a cross-purchase arrangement the proceeds would have gone directly to the surviving owner rather than to the company. Business owners should have their agreement and its funding reviewed by their attorney and CPA.
Two brothers owned a building supply company. They did the responsible thing: they signed an agreement saying that when one of them died, the company would buy back his shares so the business stayed with the survivor and the family got paid. They funded it the way most companies do — the company bought life insurance on each brother.
One brother died. The company collected the insurance and used it to buy his shares from his estate, exactly as the agreement said. Then the IRS and the estate disagreed about what those shares had been worth, and the case went to the Supreme Court.
What the Court held
On June 6, 2024, the Supreme Court decided Connelly v. United States. Two sentences from the opinion carry the whole thing:
“Life-insurance proceeds payable to a corporation are an asset that increases the corporation’s fair market value.”
“A corporation’s contractual obligation to redeem shares is not necessarily a liability that reduces a corporation’s value for purposes of the federal estate tax.”
Put plainly: the estate argued that the insurance money did not really make the company richer, because the company was obligated to spend every dollar of it buying back the dead owner’s shares. The Court said the obligation does not automatically cancel the asset. The money counted.
Why that matters to an owner
The shares in the estate are valued as of the date of death — a moment when the company is holding the insurance proceeds. If those proceeds push the company’s value up, the deceased owner’s share of that larger value is what gets taxed.
The uncomfortable part is that the same money does two jobs in the arithmetic. It raises the value being taxed, and it is the money being used to buy the shares. Plenty of agreements were drafted on the assumption that it only did the second.
This does not make the plan a failure. The family still got bought out. The business still stayed intact, which is the entire point of having an agreement. But the tax result may differ from what the owners were told when they signed, and the difference is not small in a business of real size.
The structure the Court pointed at
The opinion notes what would have been different under a cross-purchase arrangement — where the owners buy policies on each other personally instead of the company owning them. In the Court’s words, the proceeds “would have gone directly to Thomas—not to Crown.” Money that never lands on the company’s books cannot inflate the company’s value.
Cross-purchase is not automatically better. It gets unwieldy quickly: two owners need two policies, three owners need six, and the count climbs from there. Owners of very different ages and health pay very different premiums for each other. There are structures that sit in between, and which one fits depends on how many owners there are, their ages, the entity type and what the business is worth.
That is a conversation for your attorney and your CPA, with your agreement in front of them. It is not something to settle from an article, including this one.
A note on premiums
Owners often ask whether the company can deduct the premiums. Generally it cannot. Federal law disallows a deduction for “Premiums on any life insurance policy… if the taxpayer is directly or indirectly a beneficiary under the policy or contract.” Buy-sell funding is normally paid with after-tax dollars. Your CPA should confirm how that applies to your arrangement.
What to actually do
If you own part of a business and there is a buy-sell agreement in a drawer somewhere, three questions are worth asking this quarter:
- Which structure is it? Does the company buy the shares, or do the owners buy them from each other? The document says, usually in the first few pages.
- Who owns the policies? If the company is the owner and the beneficiary, this ruling is about you.
- When was the value last set? Many agreements contain a formula or a fixed figure that was reasonable years ago and is now badly out of date. An agreement funded to the wrong number fails quietly, on the worst possible day.
Nothing here is legal or tax advice, and the right answer depends on facts an article cannot see. What an article can do is tell you the ground moved in 2024 and your paperwork may predate it.
If you want a second set of eyes on how your agreement is funded — not a rewrite of the document, which is your attorney’s work, but an honest look at whether the insurance behind it still matches the business — book a conversation. If you are also behind on your own retirement, this may be worth reading next.
Questions people ask
What did Connelly v. United States decide?
Decided June 6, 2024, the Supreme Court held that life-insurance proceeds payable to a corporation are an asset that increases the corporation's fair market value, and that a corporation's contractual obligation to redeem a deceased shareholder's shares is not necessarily a liability that reduces that value for federal estate tax purposes. The estate had argued the redemption obligation offset the insurance; the Court disagreed.
Does this mean company-owned life insurance is a bad way to fund a buy-sell?
No. It means the structure has a tax consequence that many agreements were written without anticipating. A redemption agreement funded by company-owned insurance is still a legitimate and common arrangement. What changed is that you should know what it does to the value of the shares in the estate, and decide with your attorney and CPA whether it is still the structure you want.
How is a cross-purchase agreement different?
In a cross-purchase, the owners buy policies on each other personally rather than the company owning them. The Court noted that in that situation the proceeds would have gone directly to the surviving owner rather than to the company, so they would not sit on the company's balance sheet at the moment of death. Cross-purchase has its own drawbacks, including the number of policies required as owners are added.
Can the company deduct the premiums on a buy-sell policy?
Generally no. Federal law disallows a deduction for premiums on a life insurance policy where the taxpayer is directly or indirectly a beneficiary under the policy. Buy-sell funding is normally paid with after-tax dollars. Confirm the treatment of your specific arrangement with your CPA.
When was your buy-sell agreement last reviewed?
That is the real question. Many agreements were drafted years ago, use a valuation formula nobody has revisited, and were funded to a number that no longer matches what the business is worth. A ruling that changes the arithmetic is a reasonable prompt to have the document and the funding looked at together.
Sources
This article is general education, not advice for your situation. Policy features vary by carrier and state.