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Partners · The Buyout Nobody Funded
Your buy-sell agreement is a promise to write a check. Where’s the check?
Most partnerships have the document — a buy-sell agreement that says when one owner dies, the survivors buy the shares at a set price. Far fewer have the funding. An unfunded buy-sell is a legal obligation to produce hundreds of thousands or millions of dollars, due on the death of the person whose absence just cut the company’s earnings — payable to a grieving spouse who is now, legally, your business partner.
Life insurance is how buy-sells actually get funded: pennies of premium per dollar of obligation, and the money arrives income-tax-free at the exact trigger event. The design question — who owns the policies — got a lot more expensive to get wrong in 2024.
Connelly changed the math
In Connelly v. United States (2024), the Supreme Court held that insurance proceeds a company receives to redeem a deceased owner’s shares INCREASE the company’s value for estate tax — the deceased’s estate gets taxed on insurance meant to buy them out. Entity-redemption structures written before 2024 need a re-read. Cross-purchase designs avoid the issue.
Cross-purchase vs entity redemption
Cross-purchase: partners own policies on each other; survivors get a stepped-up basis in the purchased shares and the Connelly problem never arises. Redemption: the company owns one policy per partner — simpler with many partners, but post-Connelly it can inflate the taxable estate. Insurance LLCs and trusteed arrangements split the difference for multi-partner firms.
The valuation goes stale faster than the document
A buy-sell priced at the 2019 valuation funds a 2019 buyout. If the company doubled, the coverage buys half the shares and the balance comes from cash flow — at the worst possible time. We review the funding against current valuation on a schedule, not once a decade.
Asked Across the Desk
Buy-Sell Funding — the honest answers.
The obligation doesn’t die with them. The survivors owe the estate the agreement price — out of company cash flow, a bank loan taken at the moment the bank is most nervous, or an installment note that keeps the family on the cap table for years. In practice unfunded buy-sells produce fire sales, fractured partnerships, and spouses voting shares. The premium to prevent that is a rounding error against the obligation.
Post-Connelly (2024), cross-purchase is the cleaner default for most: the proceeds don’t inflate the company’s taxable value, and survivors get basis step-up in the shares they buy. Redemption still wins on simplicity when there are many partners (one policy each instead of N×(N-1)), which is where trusteed cross-purchase or a dedicated insurance LLC earns its fee. This is a design decision made with your attorney and CPA — we fund the structure they bless.
You need to re-read it, and probably re-design it. Connelly v. United States (2024) means company-owned insurance earmarked for redemption can raise the deceased owner’s estate value — estate tax on money that was supposed to buy out the estate. Depending on valuations and exemptions that may cost nothing or seven figures. The review is free; the surprise isn’t.
It prices like life insurance on each partner — age, health, and coverage amount — not like a percentage of the business. Term funding for a defined partnership horizon is often surprisingly cheap; permanent designs cost more and build cash value the agreement can also use for a lifetime buyout (disability or retirement trigger, not just death). We quote it from real carrier illustrations against your actual valuation.