If you own a business with a partner, there is a good chance you signed a buy-sell agreement years ago, put it in a drawer, and have not looked at it since.
In June 2024, the Supreme Court decided a case that may have changed what that document does. The decision was unanimous. It got very little attention outside of tax and estate law circles, and almost none of the coverage was written for the people it actually affects — the owners.
Here is what happened, in plain language, and what it is worth asking your CPA and your attorney.
What the case was about
Two brothers, Michael and Thomas Connelly, owned a building supply company in Missouri. Like a lot of closely held businesses, they had an agreement: when one of them died, the company would buy back that brother's shares so the surviving brother would end up owning the whole thing, and the family of the deceased brother would get cash instead of a stake in a business they did not run.
To make sure the company could actually afford that, the company bought life insurance on both brothers. The company owned the policies. The company was the beneficiary. This is an extremely common arrangement.
Michael died. The company collected $3.5 million in life insurance and used $3 million of it to buy his shares from his estate.
Then the IRS took a look at the estate tax return, and the disagreement that followed went all the way to the Supreme Court.
What the Court decided
The estate argued that the $3 million was essentially a wash. Yes, the company received insurance money — but it was immediately obligated to hand that money over to buy the shares. Money in, money out. So the company should not be considered $3 million richer when you value it for estate tax purposes.
The Court disagreed, unanimously.
The holding, in the Court's own framing, is that
a company's contractual obligation to redeem shares is not necessarily a liability that reduces the company's value for federal estate tax purposes. The insurance proceeds count as a company asset. The obligation to buy the shares does not cancel it out.
The practical effect is counterintuitive enough that it is worth saying twice:
the life insurance you bought to make the buyout affordable can increase the taxable value of the business at the exact moment the business is being valued for estate tax.
The distinction that matters: who owns the policy
This is the part worth understanding, because it is the difference between the two most common structures.
A redemption agreement, sometimes called an entity-purchase agreement, is where
the company buys out the deceased owner's shares. The company owns the life insurance, pays the premiums, and collects the proceeds. This is the structure at issue in Connelly, and it is the simpler one to administer — which is exactly why it is so common, especially in businesses with more than two or three owners.
A cross-purchase agreement is where
the owners personally buy out the deceased owner's shares. Each owner owns a policy on the other owners, pays those premiums personally, and collects personally. The money never touches the company's balance sheet, so it does not inflate the company's value the way Connelly describes.
Cross-purchase arrangements have their own complications. With two owners it is straightforward. With five owners it means twenty separate policies, which is why a lot of businesses chose redemption structures in the first place. There are other approaches as well, including insurance LLCs and trusteed arrangements, and which one fits depends on facts that are specific to your business.
The point is not that one structure is right and the other is wrong. The point is that the trade-offs changed in 2024, and a document drafted before that was drafted under different assumptions.
Why this hits Texas business owners harder than it looks
Texas has no state estate tax and no inheritance tax. That is genuinely good news and it is worth stating plainly.
But the federal estate tax still applies, and North Texas businesses tend to hold the kind of assets that add up faster than owners expect. Land appreciates. Equipment and trucks carry real value. A book of business, a customer list, contracts in progress, and accounts receivable all count. Add a commercial building, and a company that "isn't worth that much" on paper can land somewhere very different once a valuation is actually done.
Then there is the part that has nothing to do with tax at all:
liquidity.
When an owner dies, the business does not pause. Payroll runs. Loans come due. Vendors expect to be paid. Bonding companies and lenders start asking questions about who is in charge. If the estate owes anything, it is generally owed in cash within months — and a business, a fleet, and a section of land are not cash.
That liquidity problem exists whether or not estate tax is ever owed. It is the reason these agreements get funded with insurance in the first place, and it is why simply removing the insurance is almost never the answer.
What this does not mean
A few things worth being clear about, because this topic attracts overstatement.
This does not mean company-owned life insurance is a mistake. It means the valuation math works differently than many people assumed, and the structure deserves a fresh look.
This does not mean you need to tear up your agreement. For plenty of businesses, nothing changes. The estate tax exemption is high — $15 million per person for 2026, and $30 million for a married couple using portability — and many businesses will not come close.
And this is not a do-it-yourself project. Restructuring a buy-sell has income tax consequences, transfer-for-value risk, and basis implications that need an attorney and a CPA. Anyone who tells you the fix is simple is describing a different situation than yours.
The questions worth asking
If you take one thing from this article, take this list. Send it to your attorney or your CPA, or bring it to your next annual review.
- Is our buy-sell a redemption agreement or a cross-purchase agreement? If nobody can answer that immediately, that alone is worth an hour of professional time.
- Who owns the life insurance policies that fund it — the company, or the owners individually?
- When was the agreement last reviewed, and has anyone looked at it since June 2024?
- Does the valuation formula in our agreement still reflect what the business is actually worth? Many agreements use a formula written years ago that no longer matches reality.
- If the company collects the insurance proceeds, how does that affect our valuation for estate tax purposes now?
- Would restructuring make sense in our situation — and what would it cost in income tax, basis, or transfer-for-value exposure to make the change?
- Is the agreement funded at all for disability, or only for death? Most buy-sells fund the death trigger and leave the disability trigger completely unfunded, even though an owner becoming permanently unable to work creates the same problem.
- Do we have enough coverage in place to actually complete the buyout at today's valuation, not the valuation from when we signed?
Where an insurance agent fits
Being direct about this: your attorney and your CPA own the structure. They decide whether your agreement should change and what the tax consequences of changing it would be. We do not do that work and we would not pretend to.
What we do is the
life insurance funding side. We can help you determine what coverage exists today, who owns it, whether the amounts still line up with what the agreement requires, and what the options look like if your advisors recommend a different structure. We also handle the pieces that get forgotten — disability buy-out coverage, key person coverage, and the rest of your
business insurance coverage — the parts that keep a business running when an owner cannot.
If you are in Texas or Oklahoma and you would like a second set of eyes on the insurance side, we are a local
Wise County insurance agency and we are happy to look. Bring your CPA into that conversation. The best outcome here is the three of us reading the same document at the same time.
This article is general information about a published court decision. It is not legal advice, tax advice, or a recommendation about your specific situation. Buy-sell agreements and estate planning involve facts unique to each business, and decisions about them should be made with your own attorney and CPA.
— TAP Insurance Agency · Call (800) 666-2254 — or text QUOTE to (817) 646-6700 · tapinsuretx.com
