Buy-Sell Agreement Insurance After Connelly: What Business Owners Must Restructure in 2026

The U.S. Supreme Court’s June 2024 decision in Connelly v. United States changed the estate tax math for thousands of business owners with entity-redemption buy-sell agreements funded by life insurance. If your company owns a life insurance policy to fund a buyout of a deceased owner’s interest, and you haven’t reviewed your structure since that ruling, you likely have an estate tax exposure your attorney and insurance broker haven’t told you about yet.

This is the most consequential change to buy-sell planning in decades. It affects how corporate-owned life insurance is valued for estate tax purposes — and it means a structure that worked fine before June 2024 may now create a seven-figure estate tax liability for your family when you die.

What Connelly Changed and Why It Matters

Before the ruling, a common planning assumption held that when a corporation owns life insurance to fund a stock redemption buy-sell agreement, the insurance proceeds would not increase the company’s estate tax value because they were offset by the company’s obligation to redeem the deceased owner’s shares. The estate tax would be calculated on the pre-insurance company value.

Connelly rejected this assumption entirely. The Supreme Court held unanimously that life insurance proceeds owned by a corporation increase the company’s fair market value for estate tax purposes — and that the redemption obligation does not reduce that value, because a willing buyer would account for the insurance asset but not the contractual obligation to spend it.

The practical impact: if your company owns a $5 million life insurance policy and your shares represent 50% of the company, your estate now includes the value of your 50% interest in a company whose assets include $5 million in life insurance proceeds. Your estate tax bill goes up accordingly.

In the actual Connelly case, the difference was roughly $889,000 in additional estate tax on a relatively small closely held corporation. For business owners with larger companies or larger insurance policies, the exposure scales proportionally.

The Three Buy-Sell Structures and How Connelly Affects Each

Entity Redemption (Stock Redemption)

The company owns the policies and buys out the deceased owner’s interest directly. This is the structure most affected by Connelly. If your buy-sell is structured this way and the company owns corporate-owned life insurance (COLI) to fund it, you have a potential estate tax problem that needs to be analyzed.

The exposure is significant when: the company is a C-corporation or S-corporation (the ruling was specifically about a C-corp but has estate planning implications for S-corps), the insurance proceeds are substantial relative to company value, and the deceased owner’s estate is above the federal estate tax exemption ($13.99M in 2025, set to remain elevated under the One Big Beautiful Bill Act).

Cross-Purchase Agreement

Surviving owners purchase the deceased owner’s shares directly, funded by life insurance they each own on the other owners. Connelly does not affect cross-purchase agreements — the insurance proceeds are not company assets and don’t increase the company’s estate tax value. Cross-purchase agreements also give surviving owners a stepped-up cost basis in the acquired shares, reducing capital gains tax on any future sale.

The practical challenge with cross-purchase agreements is complexity. With three owners, each owner needs policies on each other — six policies total. With five owners, you need twenty policies. For larger ownership groups, this becomes administratively burdensome.

The LLC Trustee Structure

The post-Connelly solution that has gained the most traction is using an LLC to own the life insurance policies. The LLC is co-owned by the business owners in the same proportions as their business ownership. The LLC owns the policies and is the beneficiary. When an owner dies, the LLC receives the proceeds and distributes them to the surviving members, who then use them to purchase the deceased owner’s business interest.

Because the LLC — not the company — owns the policies, the insurance proceeds are not corporate assets and do not inflate the company’s estate tax value. This preserves the administrative simplicity of centralized policy ownership while eliminating the Connelly problem. It requires careful drafting of the LLC operating agreement and the buy-sell agreement to work correctly, but it’s legally sound and increasingly standard in post-Connelly planning.

How to Restructure Your Existing Buy-Sell Agreement

If you have an entity-redemption buy-sell agreement with corporate-owned life insurance, here is the general restructuring path. This requires coordination between your insurance advisor, business attorney, and tax advisor — the sequence and specific steps depend on your corporate structure, ownership composition, and existing policy values.

• Step 1: Audit your current structure. Identify who owns the policies, who the beneficiaries are, and how the buyout obligation is documented in your shareholder or buy-sell agreement.
• Step 2: Quantify the exposure. Calculate the estate tax impact if the Connelly rule applies — this requires knowing the current company value, the insurance proceeds, your ownership percentage, and the applicable estate tax rate.
• Step 3: Choose the right restructuring path. Options include converting to cross-purchase, transitioning to the LLC trustee structure, or purchasing new policies in the preferred structure while letting existing policies expire or be surrendered.
• Step 4: Handle existing policies correctly. Converting from entity ownership to owner ownership involves surrender values, potential gain recognition, and replacement policy underwriting. The sequencing matters — buying new coverage before surrendering existing policies avoids coverage gaps and insurability risk.
• Step 5: Redraft agreements. The buy-sell agreement and any shareholder agreement need to reflect the new structure. Generic off-the-shelf agreements don’t address the post-Connelly landscape.

How Much Does Buy-Sell Insurance Cost?

The cost of buy-sell insurance is driven by the same factors as any life insurance: the insured’s age, health, coverage amount, and policy type. What differs is how the coverage amount is determined.

Buy-sell coverage should equal the fair market value of your business interest at the time of death — which means the coverage amount should be tied to a current business valuation, not a number that was set 10 years ago when you first signed the agreement. Underfunded buy-sell agreements are extremely common. A company valued at $800,000 a decade ago that’s now worth $4M is still carrying the original insurance if no one updated it.

Realistic cost ranges for buy-sell life insurance funding:

• $2M policy on a 45-year-old healthy owner: $150–$280/month (20-year term)
• $5M policy on a 50-year-old healthy owner: $450–$700/month (20-year term)
• $5M policy using permanent IUL (for long-term cash value accumulation): $1,200–$2,000/month

Whether to use term or permanent for buy-sell funding depends on the time horizon. If the buyout event is expected to occur within a defined window (retirement at 65, a planned sale in 10 years), term aligned to that window is cost-effective. If the ownership will be long-term and the buyout is an indefinite future event, permanent insurance builds cash value that can actually fund the buyout partially from accumulated equity — useful if the business declines in value and the insurance exceeds the buyout need.