TL;DR: A buy-sell agreement is only as good as its funding and its valuation mechanism. Two failures show up again and again: the agreement names a value that was set years ago and no longer resembles the business, and the money to actually buy the departing owner’s shares was never secured. The Supreme Court’s 2024 decision in Connelly v. United States made the second problem sharper, holding that life-insurance proceeds a company receives to redeem a deceased owner’s shares count toward the company’s value for estate-tax purposes, and that the obligation to redeem is not necessarily an offsetting liability. For CPAs, attorneys, and financial planners, a buy-sell review is one of the highest-value proactive conversations available with a closely held business client.
Most buy-sell agreements are signed at formation, filed, and never opened again until something goes badly wrong. By then the document is a decade old, the value clause is stale, and nobody has confirmed the money exists. In fifteen years of working alongside CPAs, attorneys, and planners across the Gulf South, the buy-sell review is the single most common place I see a client protected from an outcome they never saw coming.
Key Takeaways
- A buy-sell has two failure points: how value is determined and where the money comes from. Both need review, not just the legal language.
- Connelly v. United States (U.S. Supreme Court, 2024) held that life-insurance proceeds used to fund a share redemption increase the company’s estate-tax value, and that a redemption obligation is not necessarily an offsetting liability.
- Cross-purchase, entity redemption, and hybrid structures differ in tax basis, administrative burden, and now estate exposure. The right answer is client-specific.
- A fixed-dollar or formula value written years ago is the most common defect I see, and it is usually the easiest to fix.
What does it mean to fund a buy-sell agreement?
Funding a buy-sell means arranging, in advance, the actual source of money that will purchase a departing owner’s interest when a trigger event occurs: death, disability, retirement, divorce, or a dispute. The agreement creates a binding obligation to buy and sell. Funding is what makes that obligation possible to perform. An agreement without funding does not fail quietly; it fails at the worst possible moment, when a family expects a check and the surviving owners discover the company cannot write one without borrowing against itself or selling assets.
The usual funding sources are life and disability insurance, company cash reserves, a sinking fund, seller financing paid out over years from future profits, or third-party borrowing. Insurance is the most common for the death trigger precisely because it delivers cash exactly when the obligation arises.
Citation capsule: Funding a buy-sell agreement means securing in advance the money that will purchase a departing owner’s interest at a trigger event such as death, disability, retirement, or divorce, most often through life or disability insurance, company reserves, seller financing, or borrowing. In Connelly v. United States (2024), the U.S. Supreme Court held that life-insurance proceeds a corporation receives to fund the redemption of a deceased shareholder’s stock are included in the corporation’s fair market value for estate-tax purposes, and that the corporation’s obligation to redeem those shares is not necessarily a liability that offsets that value.
The three funding structures, and how they differ
- Cross-purchase. The owners individually buy policies on each other and purchase the departing owner’s shares directly. Surviving owners get a basis step-up in the shares they acquire, which matters later when they sell. The drawback is administrative: with several owners, the number of policies multiplies quickly.
- Entity redemption (stock redemption). The company owns the policies and buys back the departing owner’s shares. Far simpler to administer, one policy per owner. This is the structure Connelly directly addressed, and the structure most in need of a fresh look.
- Hybrid or wait-and-see. The agreement preserves the choice at the trigger event, typically giving the company a first option and the owners a second. Maximum flexibility, most drafting complexity, and it needs genuinely careful drafting to work as intended.
Why the Connelly decision changed the conversation
In Connelly, two brothers owned a building-supply company with a redemption-style agreement funded by company-owned life insurance. When one brother died, the company collected the proceeds and used them to redeem his shares. The estate argued that the company’s obligation to redeem the shares was a liability that offset the insurance proceeds, so the proceeds should not increase the company’s value. The Supreme Court disagreed in 2024, holding that the proceeds counted in the company’s fair market value and that the redemption obligation was not necessarily an offsetting liability. The Court did not hold that a redemption obligation can never reduce value; it resolved a split among the circuits on these facts.
The practical consequence: a redemption-funded buy-sell can inflate the taxable estate of the deceased owner rather than neatly zeroing out. Estates that were planned on the older assumption may now owe materially more than expected. Two limits keep this in proportion. First, the federal estate-tax exemption is high (roughly $15M per person in 2026, about $30M for a married couple using portability), so many owners in the upper Main Street and lower-middle-market range will never owe federal estate tax at all. For them Connelly is a planning detail rather than an emergency. It matters most where company value plus insurance proceeds could push an estate toward that threshold, or where a state-level tax applies. Second, Connelly involved a C corporation. LLCs and partnerships raise related but not identical questions, and the “shares” language in this article maps to membership or partnership interests with the specifics left to counsel. This does not make entity redemption wrong; it makes it a structure that deserves deliberate review rather than inheritance from a template. Valuation practitioners have been working through the implications since the ruling, and it is worth raising with any client whose agreement is company-funded and was drafted before 2024.
Where the exposure is real, the common remedies are worth knowing so the conversation has somewhere to go: converting to a cross-purchase structure, holding the policies in a separate insurance LLC so the operating company never owns them, or restructuring so the company is not both owner and beneficiary. Each carries its own tax traps, including transfer-for-value and the employer-owned life insurance notice-and-consent requirements, which is precisely why this belongs with the client’s attorney and tax advisor rather than in a template.
This section is general information about a court decision, not legal or tax advice. Apply it with the client’s attorney and tax advisor.
The defect I see most: the value clause nobody updated
Funding gets the attention, but the valuation mechanism fails more often. Three patterns recur:
- A fixed dollar amount agreed years ago, sometimes at formation, that everyone forgot to revisit. The business has since doubled or halved. Neither side is protected.
- A formula (often a fixed multiple of book value or earnings) that made rough sense once and no longer reflects how the business is actually priced today.
- An appraisal clause with no standard. It calls for a valuation but never specifies the standard of value, the level of value, or who appraises, which is how a trigger event turns into litigation between people who used to be partners.
The durable fix is an agreement that requires a periodic independent valuation with a clearly named standard of value and a defined process. It costs far less than the dispute it prevents. Owners are also frequently surprised by the gap between the agreement’s number and what the market would actually pay, which is its own useful conversation, and one that connects directly to how recast earnings drive real-world pricing.
A practical review checklist for advisors
When a client’s buy-sell comes across your desk, five questions surface most problems quickly:
- When was the value last set, and how? Anything fixed or formula-based more than a few years old is a flag.
- Is it actually funded, and for how much? Compare policy face amounts against a current, realistic value. Underfunding is common after a growth run.
- Which structure is it, and was that chosen or inherited? Company-owned policies drafted pre-2024 warrant a Connelly conversation.
- Which triggers are covered? Death is usually handled. Disability, divorce, and involuntary departure are frequently missing entirely.
- Does the funding survive a disability or a departure? Life insurance does nothing for a partner who becomes disabled or simply wants out.
This is deliberately a coordinated review. The attorney owns the document, the CPA and planner own the tax and funding picture, and the valuation professional owns the number. Duran’s role in these engagements is the valuation and, if the owner later decides to sell, the transaction. Your client relationship stays yours, which is how our coordinated advisor process is built.
The agreement that was eleven years out of date
A CPA I work with asked me to look at a client’s buy-sell during an ordinary planning review. Two partners, a specialty contracting business, agreement signed at formation. Nothing was on fire; she simply had a habit of checking.
The document set the buyout at a fixed dollar figure the partners had agreed to eleven years earlier. The business had grown severalfold since. Had either partner died, the survivor would have acquired a materially more valuable company for a fraction of its worth, and the deceased partner’s family would have received a fraction of what they were owed, with no practical recourse because both had signed it. The life insurance in place had been sized to that same stale number, so it was underfunded against reality by a wide margin.
Nobody had acted in bad faith. They had simply signed a document at formation and never looked at it again, which is the norm rather than the exception. The fix was unglamorous: an independent valuation to establish a current number, an amended agreement requiring a refreshed valuation on a set cycle, and increased coverage to match. The partners were unsettled to learn how exposed they had been. The CPA had just delivered the most valuable thing she would do for that client all year, and she did it by asking one question during a routine meeting. (Details are a composite and identifying facts have been changed.)
FAQ
What does it mean to fund a buy-sell agreement?
It means securing in advance the money that will actually buy a departing owner’s interest when a trigger event occurs. Common sources are life and disability insurance, company reserves or a sinking fund, seller financing paid from future profits, or third-party borrowing. Without funding, the obligation to buy exists on paper but cannot be performed.
How did Connelly v. United States change buy-sell planning?
The U.S. Supreme Court held in 2024 that life-insurance proceeds a company receives to redeem a deceased owner’s shares are included in the company’s fair market value for estate-tax purposes, and the obligation to redeem is not necessarily a liability that offsets that value. Redemption-funded agreements drafted on the older assumption can produce a larger taxable estate than the owners planned for.
What is the difference between a cross-purchase and an entity redemption buy-sell?
In a cross-purchase, the owners individually buy policies on one another and purchase the departing owner’s shares directly, which gives the buyers a step-up in basis but multiplies policies as owner count grows. In an entity redemption, the company owns the policies and buys back the shares, which is simpler to administer but is the structure affected by the Connelly ruling.
How often should a buy-sell agreement be valued?
Frequently enough that the number still reflects the business. Many well-drafted agreements call for an independent valuation every one to three years, or upon a material change. A fixed dollar amount set at formation is the most common defect, and it grows more dangerous the longer the business succeeds.
Does life insurance cover every buy-sell trigger?
No. Life insurance funds the death trigger only. Disability, retirement, divorce, and involuntary departure need their own funding approach, such as disability buyout coverage, reserves, or a structured payout from future earnings. Agreements that address only death leave the more likely scenarios unfunded.
Conclusion: the review is worth more than the document
Buy-sell agreements fail in predictable ways: stale values, absent funding, and structures inherited from a template rather than chosen. Every one of those is discoverable in a single review, and every one is far cheaper to fix in advance than to litigate afterward. For advisors, it is a rare conversation that is proactive, concrete, and unmistakably valuable to the client.
If you have a client whose buy-sell needs a defensible current number, that is the piece we handle, alongside you and without disturbing your relationship. Book a co-advisor introduction and we will walk through what a valuation for buy-sell purposes involves.
Joel F. Duran has 15+ years of M&A and business brokerage experience and holds the CM&AA, M&AMI, CM&AP, CEPA, CVGA, CVB, CAIM, and CMSBB designations. Duran Advisors serves upper Main Street and lower middle market businesses across the Gulf South, including New Orleans Metro, the North Shore, Baton Rouge, Houma-Thibodaux, and South Mississippi. Examples in this article are composites and do not reference any specific client. This article is general information, not legal or tax advice; buy-sell structuring decisions should be made with the client’s attorney and tax advisor.
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