Business succession planning is the process of preparing your business to survive and transfer ownership after an owner dies, becomes disabled, or exits. Key person planning protects the company from the financial impact of losing a critical employee or partner. Together, these strategies ensure your business has the funding, legal structure, and insurance coverage to continue operating no matter what happens to the people who run it.
Three Pillars of Business Protection
A complete business protection plan covers three areas. Most businesses have gaps in at least one:
Buy-Sell Funding
Insurance-funded agreements that ensure ownership transfers at a fair price.
Learn moreKey Person Insurance
Coverage that replaces revenue and funds recruitment when a critical person is lost.
Learn moreSuccession Strategy
A documented plan for leadership transition, whether planned or unplanned.
Discuss your planIs this a fit for you?
Who This Is For
- You own a business with one or more partners and have a buy-sell agreement (or need one)
- Your business depends on one or two key revenue generators whose loss would cause financial harm
- You want your family to receive fair value for your ownership interest, not be forced into a fire sale
- Your buy-sell agreement has not been reviewed since the Connelly v. United States decision (June 2024)
- You are planning for retirement or exit within the next 5-10 years
Who This Is Not For
- You are a sole proprietor with no employees and no transferable business value
- Your business has no goodwill, customer relationships, or revenue beyond your personal effort
- All owners have sufficient personal liquidity to buy out a deceased partner's share without insurance
- You plan to close the business rather than transfer it
How do the options compare?
| Feature | Cross-Purchase | Entity Redemption |
|---|---|---|
| Who buys the interest | Surviving owners personally | The business entity |
| Policy ownership | Each owner owns policy on other owners | Business owns policies on all owners |
| Tax basis step-up | Yes, buyers get stepped-up basis | No basis adjustment for remaining owners |
| Connelly impact | Minimal: policies not a company asset | Major: life insurance proceeds increase company value for estate tax purposes |
| Complexity with 3+ owners | High: N x (N-1) policies needed | Low: one policy per owner |
| Best for | 2-3 owner businesses, tax efficiency priority | Simplicity priority, large owner groups |
What are the risks, costs, and alternatives?
Connelly v. United States changed the rules
In June 2024, the Supreme Court ruled that life insurance proceeds held by a company for entity-redemption buy-sell agreements increase the company's fair market value for estate tax purposes. This means the deceased owner's estate may owe significantly more in taxes than planned. Every entity-redemption buy-sell agreement should be reviewed immediately.
Outdated valuations create disputes
A buy-sell agreement is only as good as its valuation. If the agreed-upon price was set five years ago and the business has doubled in value, the selling family gets shortchanged. Update valuations annually or use a formula tied to current financials.
Unfunded agreements are just paper
A buy-sell agreement without insurance funding is a promise without money behind it. If the surviving owners cannot afford to buy the deceased owner's share, the agreement fails and the family may be stuck with an illiquid minority interest.
Key person coverage gaps
Many businesses insure the owners but forget to cover the top salesperson, the lead engineer, or the relationship manager whose departure would cost revenue. Identify every person whose loss would materially affect the business.
What does this look like in practice?
Meridian Engineering: Restructuring After Connelly
Illustrative example: not an actual client.
Meridian Engineering is a $12 million firm owned equally by three partners. Their entity-redemption buy-sell agreement was funded with $4 million of life insurance per partner, owned by the company. After Connelly, they realized the $12 million in insurance proceeds would be included in the company's value for estate tax purposes, inflating the deceased partner's taxable estate by $12 million.
Working with Living Prepared and their attorney, Meridian restructured to a cross-purchase arrangement. Each partner now owns policies on the other two partners. The insurance proceeds are no longer a company asset, so they do not inflate the estate value. The tax savings for the first partner's estate: an estimated $4.8 million.
Restructurings of this kind are typically measured in weeks and modest professional fees, not months.
Illustrative scenario for educational purposes. Consult your tax and legal advisors before restructuring a buy-sell agreement.
Common Questions
Why should I review my buy-sell agreement after the Connelly decision?
In June 2024, the Supreme Court held in Connelly v. United States that life insurance proceeds a company holds for an entity-redemption buy-sell can increase the company's value for estate tax purposes. A deceased owner's estate may then owe more than planned. Reviewing an entity-redemption agreement can reveal whether restructuring, such as a cross-purchase, may reduce that exposure.
Who counts as a key person in my business?
A key person is anyone whose death or departure would materially affect revenue or operations, not only the owners. This can include a top salesperson, a lead engineer, or a relationship manager who holds critical accounts. Many businesses insure the owners but overlook these employees. Identifying every person whose loss would harm the business is the first planning step.
What happens to my business if I die without a funded succession plan?
Without funding, a buy-sell agreement is a promise without money behind it. Surviving owners may lack the cash to buy your share, and your family can be left holding an illiquid minority interest instead of receiving fair value. Insurance funding is designed to create the liquidity that lets the agreed transfer actually happen.
How often should I update my business valuation?
A buy-sell agreement is only as reliable as its valuation. If the agreed price was set years ago and the business has grown, the selling family can be shortchanged, or surviving owners can overpay. Updating the valuation annually, or using a formula tied to current financials, helps keep the agreement fair as the company changes.
Related Questions
Has Your Buy-Sell Agreement Been Reviewed Since Connelly?
We offer a complimentary buy-sell agreement review to identify Connelly exposure and recommend restructuring options.
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Living Prepared, LLC is an affiliate of Whitwell & Co., LLC, an SEC-registered investment advisory firm. Insurance and annuity products are offered through licensed insurance professionals. See our Disclosures.