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.