Unfinished Business: The Connelly Case
For as long as I have been in this business — over 20 years — entity-redemption buy-sell agreements funded with life insurance provides a simple solution to a complex business succession issue.
Connelly v. United States changed that.
In the Connelly case, the Supreme Court ruled that the company’s entity-redemption buy-sell structure, combined with its valuation approach (or lack thereof)—caused the company-owned life insurance proceeds paid to the business at the owner’s death to be included in the decedent’s taxable estate. This outcome conflicts with what has been standard practice for years.
WHERE WE ARE TODAY
Nearly two years later post Connelly; our experience is that most buy-sell agreements haven’t been addressed. Do you agree or disagree? We’d love to hear your feedback below:
In our experience, our clients with Entity Purchase Buy-Sell Agreements are:
- Unaware or Complacent: The business is growing, things are busy, and the buy-sell — some of which have been in place for decades — hasn’t been revisited. Nothing has changed.
- Reviewed and No Action: The advisory team took a look and concluded that either the business value isn’t large enough to create a taxable estate issue, or the owners don’t have the estate tax exposure to make this a priority. For some clients, this is a reasonable and defensible conclusion — for now. Others know they have an issue, but taking the time to fix it opens a can of worms they aren’t ready to tackle right now.
- Proactive: The buy-sell agreement has been reviewed and has been changed likely to a cross-purchase structure or a special purpose Insurance LLC. Existing policies have been evaluated for transfer or new coverage is being secured.
- Other: Fillable answer
THE COST OF WAITING
My father, George, always says: “Son, time always works against you in this business.”
Here are three reasons why waiting is working against your clients:
- Business valuations are rising. Many closely held businesses use earnings multiples, revenue, or asset values to determine worth — all of which tend to track broader market growth. The S&P 500 has gained approximately 43% since the Supreme Court’s ruling in June 2024. The privately held business that wasn’t large enough to worry about two years ago deserves a fresh look today.
- Your clients’ accounts are larger than they were. That same market growth has lifted personal balance sheets. The client who may have been under the estate tax threshold in 2024 may not be in 2026.
- Insurance premiums only move in one direction. Every year without action is another year older for the insured owners. If the new plan involves securing new coverage (even if it is term) the cost of that insurance increases with every birthday that passes (or each pick-up basketball game if you are me!). Good health today is not a guarantee of good health tomorrow.
ROLLING UP OUR SLEEVES
There’s no universal fix—and every situation is unique (that’s why we love this industry).Some owners aren’t insurable. Some policies can’t be moved without triggering transfer-for-value issues. Sometimes the math simply doesn’t work.
That’s part of the conversation. Where solutions do exist, we’re typically looking at two paths:
Cross-Purchase
Owners hold policies on each other and buy interests directly. Clean from a Connelly standpoint and provides a basis step-up—but can get complicated with multiple owners.
Insurance LLC
Often the better solution for larger or multi-owner businesses. Centralizes policy ownership, helps manage premium differences, and keeps proceeds out of the business value—solving the core issue.
Either way, this takes coordination between legal, tax, and insurance advisors.
A buy-sell agreement that creates the problem it was designed to solve isn’t a plan. It’s unfinished business.
We’d love to hear from you and will get back to you with everyone’s answers to our question!