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Connelly v. United States: How the Supreme Court Changed Buy-Sell Planning
June 6, 2024 Supreme Court Decision | Updated July 2026
On June 6, 2024, the Supreme Court unanimously ruled in Connelly v. United States (602 U.S. 257) that life insurance proceeds held by a corporation to fund a stock redemption agreement increase the fair market value of the deceased shareholder's stock for estate tax purposes. This reversed decades of common planning practice under Estate of Blount and similar cases. Every closely held business with a life-insurance-funded entity-redemption buy-sell agreement should review its structure immediately.
What Happened
Michael Connelly and his brother Thomas were the sole shareholders of Crown C Supply, a building materials company. Michael owned 77.18% and Thomas owned 22.82%. The brothers had a buy-sell agreement requiring Crown C to redeem a deceased shareholder's stock. To fund the redemption, Crown C purchased $3.5 million in life insurance on Michael's life.
Michael died in 2013. At the time of death, Crown C received $3.5 million in life insurance proceeds. The estate reported Michael's shares at $3.86 million, based on an agreed-upon valuation that effectively excluded the insurance proceeds from the company's value. The IRS disagreed, arguing that the $3.5 million in insurance proceeds should be included in Crown C's value when calculating the fair market value of Michael's stock.
The Eighth Circuit Court of Appeals sided with the IRS. The Supreme Court affirmed, holding unanimously that a corporation's contractual obligation to redeem shares at fair market value does not offset the life insurance proceeds for valuation purposes. The insurance proceeds increase the company's assets, which increases the value of the deceased shareholder's stock, which increases the estate tax.
Why It Matters
Before Connelly, many tax advisors structured entity-redemption buy-sell agreements with the assumption that life insurance proceeds held by the corporation would not inflate the value of the deceased shareholder's stock. This was based on the theory that the redemption obligation offset the insurance asset. The Supreme Court rejected this theory.
The Math: How Connelly Changes the Estate Tax
| Item | Before Connelly | After Connelly |
|---|---|---|
| Company operating value | $3,860,000 | $3,860,000 |
| Life insurance proceeds | $0 (excluded) | $3,500,000 (included) |
| Total company value | $3,860,000 | $7,360,000 |
| Deceased's share (77.18%) | $2,979,748 | $5,680,048 |
| Additional estate tax exposure (at 40%) | $0 | $1,080,120 |
Simplified illustration. Actual estate tax depends on exemption amount, other estate assets, and applicable deductions.
Who Is Affected
- 1.Any closely held business with an entity-redemption buy-sell agreement funded by life insurance. This is the direct impact. If the corporation owns the policies and is obligated to redeem shares, the insurance proceeds inflate the estate value.
- 2.S corporations with redemption agreements. The ruling applies regardless of entity type. S corps, C corps, and LLCs taxed as corporations are all affected.
- 3.Businesses that have not reviewed their buy-sell agreements since before June 2024. If your agreement was drafted before Connelly, it was likely drafted under assumptions that are no longer valid.
Who Is NOT Affected
- Cross-purchase agreements where individual shareholders own the policies (not the corporation)
- Businesses without life-insurance-funded buy-sell agreements
- Sole proprietorships (no stock to redeem)
- Businesses where the estate is well below the federal exemption with no risk of exceeding it
What Business Owners Should Do Now
1. Review Your Buy-Sell Agreement Structure
Determine whether your agreement uses entity redemption (corporation buys the shares) or cross-purchase (individual owners buy the shares). If entity redemption, you have Connelly exposure.
2. Consider Converting to Cross-Purchase
In a cross-purchase arrangement, the surviving owners (not the corporation) own the life insurance policies and purchase the deceased owner's shares directly. Because the corporation never holds the insurance proceeds, the proceeds do not inflate the company's value. This is the most direct solution to the Connelly problem.
3. Evaluate a Wait-and-See Agreement
A wait-and-see buy-sell agreement gives the surviving owners the first option to purchase shares (cross-purchase), with the corporation as a backup purchaser (entity redemption) only if the owners decline. This provides flexibility while prioritizing the cross-purchase structure.
4. Update Your Valuation
If your buy-sell agreement has a fixed price or a formula that has not been updated, the funding amount is almost certainly wrong regardless of Connelly. Get a current valuation and ensure the life insurance coverage matches.
5. Coordinate with Your Team
This is not a do-it-yourself fix. You need your estate attorney to restructure the agreement, your CPA to model the tax implications, your insurance advisor to restructure policy ownership, and your financial advisor to ensure the solution fits your overall plan. Living Prepared and Whitwell & Co. coordinate this process for clients.
Cross-Purchase Is Not Always Simple
While converting to cross-purchase is the most common response to Connelly, it introduces its own complexities:
- Number of policies: In a cross-purchase arrangement with N owners, you need N x (N-1) policies. Three owners need six policies. Five owners need twenty. A trust structure or LLC can reduce this.
- Premium inequality: Older or less healthy owners cost more to insure. The younger, healthier owners pay higher premiums to insure the older owners. This creates fairness issues that must be addressed in the agreement.
- Transfer-for-value risk: Transferring an existing corporate-owned policy to an individual owner can trigger the transfer-for-value rule under IRC Section 101(a)(2), making the death benefit taxable. Exceptions exist for transfers to partners, the insured, or a partnership of the insured, but the analysis is critical.
- Policy ownership tracking: Each owner is responsible for paying premiums on the policies they own. If an owner stops paying, a policy could lapse, leaving the arrangement unfunded.
The Bottom Line
Connelly v. United States did not make entity-redemption buy-sell agreements illegal. It made them more expensive from an estate-tax perspective. For businesses where the deceased owner's estate exceeds the federal exemption, the additional estate tax exposure can be significant, potentially hundreds of thousands or millions of dollars. For businesses where the estate is well below the federal exemption, the impact may be minimal today, but could become significant if the business grows in value and the owner's estate later exceeds the exemption, or if a state estate tax applies at a lower threshold.
The prudent response is not panic but review. Understand your current structure, quantify the exposure, and implement the right correction with the right professional team.
Related Reading
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