Two brothers own a building-supply company in St. Louis. They do what every adviser tells co-owners to do. They sign a buy-sell agreement so that if one of them dies, the business stays with the survivor and the family of the one who died gets paid. They fund it with life insurance, $3.5 million on each brother, owned by the company.

One brother dies. The agreement works more or less as intended: the company uses the insurance to buy his shares from his estate. Then the IRS assesses an additional $889,914 in federal estate tax, The estate challenges it and loses, finally before a unanimous Supreme Court.

That is Connelly v. United States, decided June 6, 2024. It didn't make buy-sell agreements a bad idea. It showed that one common way of funding them carries a tax cost that many co-owners never priced in. Agreements signed before June 2024 were drafted without the benefit of that ruling, and any that haven't been reviewed since deserve a look.

What a buy-sell agreement does, in two minutes

A buy-sell agreement is a contract among business owners, and usually the business itself, that says what happens to an owner's interest when certain events occur: death, disability, divorce, retirement, or a falling-out. It answers three questions in advance. Who must or may buy? At what price? And where does the money come from?

The money question is where life insurance comes in, and there are two basic structures:

Redemption agreements became the default for many closely held companies because they're easier to administer. Connelly is about redemption agreements.

If your governing documents don't address any of this, start with our comparison of operating agreements and shareholder agreements. That's where these provisions usually live.

What happened in Connelly

The facts, from the Supreme Court's opinion:

The estate's argument was intuitive. Yes, the company received $3 million of insurance, but it was obligated to pay that same $3 million out to buy Michael's shares. The obligation offsets the asset, so the insurance shouldn't increase the company's value.

Justice Thomas, writing for all nine justices, rejected that. The Court held that “Crown's contractual obligation to redeem Michael's shares did not diminish the value of those shares.” The reasoning is about what a hypothetical buyer would pay for Michael's shares at the moment of death. A redemption at fair market value doesn't change any shareholder's economic interest. Before the redemption, Michael's shares represented 77.18% of a company that held the insurance cash. After it, Thomas owned 100% of a company that had less cash. As the Court put it, “a fair-market-value redemption has no effect on any shareholder's economic interest,” so a willing buyer wouldn't treat the redemption obligation as a liability that reduces the shares' value.

In plain terms, the insurance proceeds increased the company's value for estate-tax purposes, and the obligation to spend them on the buyout did not offset that increase.

The Court also pointed out what the brothers could have done instead: “A cross-purchase agreement would have allowed Thomas to purchase Michael's shares and keep Crown in the family.” Under that structure the insurance would have been paid to Thomas, not to Crown, and would not have increased the company's value. The Court added that “every arrangement has its own drawbacks.” With a cross-purchase, each owner has to keep paying premiums on the other's policy, and the tax consequences are different.

A second lesson hiding in the facts

There's a detail in Connelly that gets less attention than the holding. The agreement called for an outside appraisal, and the parties skipped it, agreeing on a number instead. The Court noted that a buy-sell agreement “may delineate how to set a price for the shares,” but “it is ordinarily not dispositive for valuing the decedent's shares for the estate tax.”

So two things went wrong. The structure put the insurance inside the company, and the price was set informally rather than by the mechanism the agreement itself required. If your agreement uses a fixed price that hasn't been updated, or an annual “certificate of agreed value” nobody has signed in years, the price you pay each other may bear little relation to the value the IRS uses. That can leave a surviving owner and a family arguing about the gap.

Who actually needs to worry now

This is where the 2026 numbers matter. For people who die in 2026, the federal estate tax basic exclusion amount is $15,000,000 per person, set by the July 2025 tax law (Public Law 119-21) and confirmed in IRS Revenue Procedure 2025-32. The amount is adjusted for inflation after 2026, and the law sets no expiration date, though a future Congress can always change it. A surviving spouse can also elect to use a deceased spouse's unused exclusion, which the IRS explains on its estate and gift tax update page.

So a co-owner whose total estate, including the business interest as Connelly would value it, sits comfortably under $15 million faces no federal estate tax from the Connelly effect. That covers most small-business owners.

It doesn't end the analysis. You should still review your agreement if:

The fixes, and their tradeoffs

There is no one right answer. Here are the structures a lawyer and your insurance and tax advisers will usually put on the table.

Switch to a cross-purchase. The owners own policies on each other. The proceeds go to the surviving owner, who buys the shares, so the company's value isn't inflated. The tradeoffs are more policies, uneven premiums when owners differ in age or health, and the risk the Court identified: an owner might stop paying.

Be careful about moving existing company-owned policies to the owners. Under the transfer-for-value rule in Internal Revenue Code § 101(a)(2), a policy transferred for value can lose its income-tax-free status. The exceptions cover transfers to the insured, to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is a shareholder or officer. A sale of a corporate policy to a fellow shareholder is not on that list. This needs to be planned with a tax adviser, not done with a change-of-ownership form.

Use a trust or separate entity to hold the policies. In a trusteed or escrowed cross-purchase, one trustee holds a single policy per owner on behalf of the others, which cuts the policy count. Some advisers use a separate partnership or LLC owned by the business owners to hold the policies, partly because transfers to a partner of the insured fall within a transfer-for-value exception. These structures add cost and paperwork, and the tax treatment depends on how they are set up. Get advice specific to your facts.

Keep the redemption and plan around the result. For many owners comfortably under the exemption, the simplest answer may be to keep the existing structure. Then fix the price mechanism and make sure everyone understands how the insurance affects the company's value. That's a legitimate choice if it's a deliberate one.

Check the paperwork on company-owned policies. Proceeds of employer-owned life insurance can lose their tax-free treatment unless the insured was given written notice and consented in writing before the policy was issued, under § 101(j). If your company bought policies without that notice and consent, raise it now.

Your choice of entity matters here too. The transfer-for-value exceptions and many of the mechanics differ for corporations and for LLCs taxed as partnerships. Our LLC vs. S corp vs. C corp guide covers the basics.

A year-end review checklist

Before December 31, pull your agreement and answer these in writing:

  1. Structure: Is it a redemption, a cross-purchase, or a hybrid with an option like the Connellys'? Who owns each policy, and who is the beneficiary?
  2. Insurance amounts: Does the coverage still match what the agreement would require someone to pay?
  3. Price mechanism: Fixed price, formula, or appraisal? When was it last updated? Does it say whether insurance proceeds count toward value?
  4. The Connelly math: For each owner, what is their share of company value with the death benefit included, and where does that leave their total estate against the federal exemption and any state threshold?
  5. Triggers beyond death: Does the agreement cover disability, retirement, divorce, and departure, and how are those buyouts funded when there's no death benefit?
  6. Compliance details: Were the § 101(j) notice and consent forms signed for company-owned policies?
  7. Fit with the rest of the plan: Does it line up with each owner's estate plan and with your broader succession plan? If a sale to an outside buyer is likely in the next few years, how does the agreement interact with selling the business?

If an answer is “I don't know,” that's the item to take to your lawyer and your CPA first.

The takeaway

Connelly didn't change what buy-sell agreements are for. It settled a valuation question in a way that disfavors company-owned insurance for owners with taxable estates. With the exemption at $15 million, most small-business owners won't feel the federal tax effect. Many of them will still find that the agreement they signed years ago has a stale price, the wrong insurance amount, or no answer for anything except death. The holding is a good reason to check.

This article reflects the Supreme Court's decision in Connelly v. United States, No. 23-146 (U.S. June 6, 2024), and federal estate tax figures for 2026, as of October 2026. Estate, gift, and income tax consequences depend on your specific facts and state law. This is general information, not legal or tax advice.

This article is for educational purposes only and does not constitute legal, tax, or financial advice. Consult a qualified professional for guidance specific to your situation.