When an owner dies, who buys their share — and where does the cash come from?
An entity purchase buy-sell agreement lets the business itself buy back a deceased owner’s interest, funded by company-owned life insurance. The family gets paid in cash. The survivors keep control. Here’s exactly how it works:
What is an entity purchase buy-sell agreement?
An entity purchase buy-sell agreement — often called a stock-redemption agreement — is a contract among the owners of a closely held business and the business itself. It sets, in advance, what happens to an owner’s interest when a triggering event occurs: most commonly death, but also disability, retirement, or a voluntary departure.
In the entity-purchase version, the business is the buyer. The company owns a life insurance policy on each owner, pays the premiums, and is named as the policy’s beneficiary. When an owner dies, the business collects the death benefit and uses that cash to redeem (buy back) the deceased owner’s shares directly from their estate.
The result is clean and predictable: the deceased owner’s family receives fair-market cash for an asset that is otherwise nearly impossible to sell, and the surviving owners keep full control of a business they don’t have to scramble to refinance. Ownership simply consolidates among those who remain.
Because only one policy per owner is required — no matter how many owners there are — the entity structure has long been the default for companies with three or more owners, where the alternative cross-purchase approach would demand a tangle of policies.
The company insures each owner, then uses the insurance money to buy out whoever dies first. Family gets paid; survivors keep the business; the agreement removes the guesswork about price and process.
Why owners put one in place
Guaranteed buyer. No owner’s family is stuck holding an unmarketable minority stake.
Guaranteed cash. Life insurance funds the purchase the moment it’s needed — no loans, no asset sales.
Locked-in price & method. The agreement fixes how the business is valued, heading off family disputes.
Continuity. Customers, lenders, and employees see a stable, single line of control.
Keeps outsiders out. Heirs can’t force their way into management or sell to a competitor.
Coverage keeps the doors open — and the family taken care of — no matter which owner is gone.
How the funding flows
A life-insurance-funded entity purchase runs on a simple, repeatable sequence — set up once, and it executes automatically when it’s needed most.
Value the business
Owners agree on a valuation method (or a blend) and write it into the agreement, so the buy-out price is settled long before anyone needs it.
Business buys the policies
The company applies for, owns, and pays premiums on one life insurance policy per owner, sized to that owner’s share of the business value.
An owner dies
The triggering event hits. Under the agreement, the estate must sell, and the business must buy — no negotiation, no second-guessing.
Redeem & consolidate
The company collects the tax-free death benefit, pays the estate in cash, and retires the shares. Surviving owners’ percentages rise automatically.
Curious what this would cost to fund?
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Entity purchase: the pros and the cons
After 25-plus years structuring these plans, here’s the candid trade-off. The entity approach is the simplest to administer — but the Connelly ruling and a few long-standing tax traps mean it is no longer the automatic choice it once was.
Advantages
- +
One policy per owner. The number of policies stays small no matter how many owners you add — a decisive edge for businesses with three or more owners.
- +
Simple, centralized administration. The company owns every policy, tracks every beneficiary, and pays from one checkbook.
- +
Equalized premium cost. The business pays all premiums, so a younger, healthier owner isn’t stuck paying more to insure an older co-owner — and vice versa.
- +
Fewer owner disputes. The entity executes the buy-out, so survivors don’t argue over who pays what or who buys how much.
- +
Easy to add or remove owners. Ownership changes mean adding or cancelling a single policy — not re-papering a web of cross-policies.
- +
Continuity of control. Shares retire into the company; outside heirs never gain a seat at the table.
Drawbacks & risks
- −
The Connelly problem. The Supreme Court held that company-owned insurance proceeds increase the business’s value for estate tax — and the redemption obligation does not offset it. This can inflate a deceased owner’s taxable estate. (Details below.)
- −
No basis step-up for survivors. When the entity redeems the shares, surviving owners keep their original cost basis. A future sale of the company can trigger far more capital-gains tax than under a cross-purchase.
- −
Creditor exposure. Because the business owns the policies and proceeds, those funds can be reachable by the company’s creditors before they ever reach the family.
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C-corporation AMT. Large death benefits received by a C corporation can feed the corporate alternative minimum tax.
- −
EOLI compliance. Employer-owned life insurance requires a Notice and Consent (IRS Form 8925) before the policy is issued — miss it, and the death benefit can become taxable.
- −
Redemption & attribution traps. For corporations, a redemption can be recharacterized as a taxable dividend, and family-attribution rules (§318) can complicate family-owned companies.
Entity purchase vs. cross-purchase vs. own-your-own-policy
There is no single “best” buy-sell structure — only the right fit for your number of owners, your entity type, and your estate-tax exposure. Here’s how the three life-insurance-funded approaches compare on the factors that actually move the needle.
| Factor | Entity Purchase Stock redemption — business owns the policies | Cross-Purchase Each owner insures the other owners | Own-Your-Own Policy Each owner insures their own life, endorsed to others |
|---|---|---|---|
| Who owns the policy | The business entity | Each owner, on every other owner | Each owner, on their own life |
| Policies for N owners | N One per owner | N × (N−1) Grows fast | N One per owner |
| Premium fairness | Equalized Company pays all | Uneven Insuring older/less-healthy owners costs more | Fair Each pays for own coverage |
| Estate-tax / Connelly exposure | Higher Proceeds can inflate company value | Lower Proceeds bypass the company | Lower Proceeds stay outside the entity |
| Basis step-up for survivors | No Basis unchanged | Yes Full step-up on purchased shares | Yes Cross-purchase mechanics |
| Creditor protection | Weaker Reachable by business creditors | Stronger Held individually | Stronger Owner controls the policy |
| Portability if owner leaves | Low Business owns it | Limited Others own it | High Owner keeps their own policy |
| Administrative complexity | Lowest | Medium | High Split-dollar paperwork |
| Best fit | 3+ owners wanting simplicity, modest estates | 2–3 owners focused on tax efficiency | Owners wanting one policy each and tax efficiency |
A growing post-Connelly alternative is the special-purpose insurance LLC: a separate LLC owns one policy per owner and distributes proceeds so surviving owners buy the shares — delivering cross-purchase tax results (step-up, proceeds outside the operating company) without policy proliferation. It adds a separate partnership tax return and its own drafting considerations.
Entity Purchase
- + Only one policy per owner
- + Simple, centralized administration
- + Equal premium cost across owners
- − Connelly can raise estate tax
- − No basis step-up for survivors
- − Creditor & C-corp AMT exposure
Cross-Purchase
- + Proceeds bypass the company
- + Full basis step-up for buyers
- + Income-tax-free benefit to owners
- − Policy count explodes with owners
- − Uneven premiums by age/health
- − Transfer-for-value risk on changes
Own-Your-Own Policy
- + One policy per owner, kept by the owner
- + Portable if they retire or leave
- + Proceeds stay outside the entity
- − More complex to draft
- − Imputed economic-benefit cost
- − Doesn’t fit every entity type
What Connelly v. United States means for your buy-sell
In a unanimous opinion by Justice Thomas, the Court reshaped how company-owned life insurance is valued for estate tax — and put a spotlight on every entity-purchase plan in the country. If your agreement is a stock redemption, this is the case to understand.
The facts
Brothers Michael and Thomas Connelly were the sole shareholders of Crown C Supply, a closely held building-supply corporation. Their agreement gave the surviving brother the option to buy the deceased’s shares; if he declined, the corporation was required to redeem them.1
To fund that obligation, Crown bought $3.5 million of life insurance on each brother. When Michael died, Thomas declined to buy, so Crown was obligated to redeem. The family agreed Michael’s shares were worth $3 million, and Crown paid the estate that amount.1, 2
The dispute
On audit, everyone agreed the life-insurance proceeds were a corporate asset. The narrow fight was this: does the company’s obligation to redeem the deceased’s shares act as a liability that offsets those proceeds when valuing the company for estate tax?1
The estate valued Crown without the insurance (relying on the older Blount line of cases). The IRS insisted the proceeds counted in full. The District Court and the Eighth Circuit sided with the IRS; the Supreme Court agreed to settle a circuit split.2, 3
A corporation’s obligation to redeem a deceased shareholder’s stock is not a liability that reduces the corporation’s value for federal estate tax. Life-insurance proceeds payable to the company are an asset that increases its fair market value — and the redemption obligation does not offset them. A hypothetical buyer, the Court reasoned, would not treat a dollar-for-dollar share buy-back as making the company worth less.1
Case figures drawn from the slip opinion and case syllabus (sources 1–2).
💡 What it means for owners & advisors
Redemption plans can inflate the estate. Company-owned insurance used to redeem shares may raise the deceased owner’s taxable estate — the opposite of what many plans assumed.1
It likely reaches all closely held entities — corporations, partnerships, and LLCs that use entity-owned insurance to fund redemptions.4, 5
Get a date-of-death appraisal. The Connellys obtained none; a proper valuation is now essential and IRS scrutiny is rising.5
Cross-purchase and own-your-own structures sidestep the problem by keeping proceeds outside the operating company.4
The exemption is now $15M per person (2026), made permanent. Many estates won’t owe federal tax — but inclusion still matters near the threshold, for state estate taxes with far lower limits, and for basis planning.6
A narrow door remains open. The Court did not say a redemption obligation can never reduce value, and noted plans funded by liquidating operating assets may differ. Coordinate with your attorney and CPA.1
📚 Sources for this section
Connelly v. United States, 602 U.S. ___, No. 23–146 (June 6, 2024) (slip opinion, Thomas, J.). supremecourt.gov
Connelly v. United States, 602 U.S. ___ (2024) — case summary, syllabus & valuation figures. Justia U.S. Supreme Court Center. supreme.justia.com
Connelly v. Internal Revenue Service — procedural history, §2703(b) and the Blount circuit split. Cornell Legal Information Institute. law.cornell.edu
Business Buy-Sell Agreements In The Wake of Connelly v. IRS — reach across entity types; cross-purchase, own-your-own & insurance-LLC alternatives. Kitces.com. kitces.com
It’s Time to Revisit Buy-Sell Agreements After the Supreme Court’s Connelly Decision — appraisal need & rising IRS scrutiny. Harris Beach Murtha. harrisbeachmurtha.com
2026 Outlook: The One Big Beautiful Bill Act & Permanent Estate Tax Exemptions — $15M per-person exemption effective 2026. Harter Secrest & Emery LLP. hselaw.com
Want this reviewed for your business?
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Funding your buy-sell with life insurance
A signed agreement is only a promise until it’s funded. Life insurance is the cornerstone — it turns a small annual premium into the exact lump sum the business needs the day an owner dies.
When an owner dies, the agreement obligates a purchase — but the cash has to come from somewhere. Few businesses keep six or seven figures idle for that day, and borrowing or selling assets in a crisis is exactly what a buy-sell exists to prevent. Life insurance solves the timing problem: the death benefit arrives precisely when the buy-out is triggered.
The appeal is leverage. The business funds a large, fixed obligation for pennies on the dollar in annual premium — and the death benefit is generally received income-tax-free. Ownership of the policy is then matched to your structure: the entity owns it in a redemption plan, the owners own it in a cross-purchase, or each owner owns their own in an own-your-own arrangement.
- ⚡
Immediate liquidity — full benefit paid at death, when the obligation hits.
- 💲
Leverage — a modest premium funds the entire buy-out amount.
- 🧾
Generally income-tax-free proceeds (file IRS Form 8925 for entity-owned policies).
- 🔒
Certainty — the benefit is fixed and guaranteed, subject to the insurer’s claims-paying ability.
- 🎯
Structure-flexible — policy ownership can mirror entity, cross-purchase, or own-your-own designs
Illustrative only — not a quote. Use the funding calculator below to size the actual benefit your agreement needs.
⏱️ Term life
- + Most coverage per premium dollar
- + Good for time-limited needs (loan payoff, planned exit)
- – Coverage ends when the term does
♻️ Permanent life
- + Pays regardless of when death occurs
- + Cash value can support redemption or retirement
- – Higher premium than term
One limitation to plan around: life insurance funds only the death trigger (with the possibility of adding chronic or critical illness triggers). An owner who is alive but permanently unable to work, or is unable to do their specific job, is just as disruptive — which is where disability buy-out coverage comes in.
Funding your buy-sell with disability insurance
A buy-sell isn’t only about death. An owner can be sidelined by illness or injury — still owning their stake, often still drawing income — and most agreements have no funded plan for it. Disability buy-out insurance fixes that gap.
It’s the trigger owners forget, yet during the working years it’s the more likely one. According to the Social Security Administration, just over 1 in 4 of today’s 20-year-olds will become disabled before they reach retirement age. A permanently disabled co-owner can’t contribute — but may still hold equity and expect to be paid.
Ordinary disability income insurance won’t solve this. It replaces a disabled person’s paycheck; it does not supply the capital to buy them out. For that you need Disability Buy-Out (DBO) insurance — a distinct policy built to fund the purchase of a disabled owner’s interest under the agreement.
After a qualifying disability and an elimination period — commonly 12 to 24 months, long enough to confirm the condition is lasting — the policy pays a lump sum, structured installments, or a blend, giving the business the cash to complete the buy-out cleanly.
- 🪛
Funds the “living” trigger a death-benefit policy can’t touch.
- 💵
Lump-sum or installment payout to complete the purchase.
- ⏳
Long elimination period confirms the disability is permanent before funds release.
- 🏢
Protects the business from indefinitely paying a non-working owner.
- 🔗
Pairs with life insurance so both triggers — death and disability — are funded.
Qualifying disability. An owner becomes totally disabled as defined in the policy and the agreement.
Elimination period. A waiting period (often 12–24 months) confirms the disability is lasting.
Buy-out funded. The policy pays a lump sum and/or installments to purchase the disabled owner’s interest.
👤 Disability income (DI)
- + Keeps personal income flowing
- – Provides no capital to purchase shares
🏢 Disability buy-out (DBO)
- + Funds the actual purchase of the interest
- + Coordinates with the buy-sell’s disability terms
Drafting tip from 25+ years of these plans: define “disability” the same way in the policy and the agreement. Mismatched definitions are the most common reason a disability buy-out fails to pay when everyone expected it to.
Funding with a combination of life & disability insurance
The most complete approach doesn’t choose between the two — it layers them. Life insurance funds the death trigger; disability buy-out insurance funds the living one. Together they leave no exit unfunded.
Death
An owner dies and the estate must be bought out.
Funded by life insurancePermanent disability
An owner is permanently unable to work or to perform their specific role.
Funded by disability buy-outChronic / critical illness
A qualifying serious illness accelerates an owner’s exit.
Funded by living-benefit riders Optional add-on to the life policy- ✓
Gap-free coverage. Every way an owner can exit — death or disability — has a funded source behind it.
- ✓
Coordinated definitions. Drafting both policies alongside the agreement keeps “disability” and valuation consistent.
- ✓
One agreement, fully backed. The same buy-sell governs both triggers, so there’s no scramble to amend later.
- ✓
Often one underwriting process. Life and disability buy-out coverage can frequently be arranged together.
- ✓
Optional living benefits. Chronic or critical-illness riders on the life policy can advance funds before death.
- ✓
Peace of mind. Owners and families know the buy-out is funded no matter which event comes first.
The expert’s default: for most multi-owner businesses, the combined approach is the one I recommend exploring first. Size the life-insurance portion with the calculator below, then have an advisor layer in disability buy-out coverage and any living-benefit riders.
Fund every exit — death and disability.
Tailor your life-insurance need, then talk to an expert about layering in disability coverage.
What if an owner is uninsurable?
Sometimes an owner can’t qualify for life or disability coverage — due to health history, age, or a hazardous occupation. The agreement still needs a plan. The good news, after 25-plus years of these cases: uninsurable rarely means unfundable.
Shop impaired-risk & specialty carriers
Underwriting varies widely by insurer. Specialty and impaired-risk carriers, table-rating and “table-shave” programs, and simplified- or guaranteed-issue products can often place coverage that a standard carrier declined — sometimes at a higher but workable premium.
Insure what you can, backstop the rest
A rated or reduced-amount policy rarely covers the full buy-out — but partial insurance plus a funded backstop (below) closes the gap. Don’t let “not fully insurable” become “not insured at all.”
Build a sinking fund
The business sets aside cash over time into a dedicated reserve earmarked for the buy-out. Flexible and simple — but slow to accumulate and potentially short if a trigger occurs early, so it’s best paired with other methods.
Installment buy-out / promissory note
The agreement can require the purchase to be paid over time from future cash flow, secured by a promissory note with interest. It spreads the cost when insurance isn’t available, and pairs naturally with partial coverage.
Adjust the structure
Sometimes the fix is structural — for example, a cross-purchase that insures only the healthy owners, with the uninsurable owner’s exit funded by a note or reserve. The right structure can route around an insurability problem.
Bank financing (last resort)
If nothing else is in place, the buyer borrows at the time of the buy-out. It’s the least certain option — credit and rates aren’t guaranteed when the day comes — so treat it as a fallback, not a plan.
The one rule that matters most: the worst plan is no plan. A partially funded agreement with a structured payout beats an unfunded promise every time. Put the agreement in place now, fund it to the extent you can, and re-shop coverage as health and finances change — insurability isn’t always permanent.
See exactly how much coverage your entity needs
Stop guessing at the buy-out price. Our Entity Purchase Funding Calculator values your business five recognized ways, then sizes the life insurance the company should carry on each owner — so the agreement is fully funded the day it’s signed.
- ✓ Value your business 5 ways: EBITDA multiple, book value, capitalization of earnings, excess-earnings, and a blended figure
- ✓ Per-owner coverage based on each owner’s percentage
- ✓ Flags any policy set below the calculated need
- ✓ Connects straight to instant-decision quotes
Entity purchase buy-sell FAQ
Fund your buy-sell the right way
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References
Connelly v. United States, 602 U.S. ___, No. 23–146 (June 6, 2024) (slip opinion, Thomas, J.). supremecourt.gov
Connelly v. United States, 602 U.S. ___ (2024) — case summary and syllabus. Justia. supreme.justia.com
Connelly v. Internal Revenue Service — Supreme Court Bulletin. Cornell Legal Information Institute. law.cornell.edu
Business Buy-Sell Agreements In The Wake of Connelly v. IRS — pros/cons of cross-purchase vs. entity-purchase and the insurance LLC. Kitces.com. kitces.com
Strategies for buy-sell agreements using insurance — insurance LLC mechanics, transfer-for-value. Thompson Coburn LLP. thompsoncoburn.com
Own Your Own Policy Buy-Sell — endorsement split-dollar structure. Diversified Brokerage Services (DBS). dbs-lifemark.com
Tax Considerations for Cross-Purchase vs. Entity-Purchase Buy-Sell Agreements. Cummings & Cummings Law. cummings.law
It’s Time to Revisit Buy-Sell Agreements After Connelly. Harris Beach Murtha. harrisbeachmurtha.com
2026 Outlook: The One Big Beautiful Bill Act and Permanent Estate Tax Exemptions. Harter Secrest & Emery LLP. hselaw.com
Important disclosures
This site is for educational purposes, and QB Insurance LLC, nor its agents, provide tax or legal advice. We are trying to provide relevant information for funding a buy-sell agreement with life insurance, long-term care and/or disability insurance.
This page is provided by Quote-Bot for general educational purposes only and reflects information available as of its publication. It is not legal, tax, accounting, or investment advice, and no attorney-client or fiduciary relationship is created by reading it. Buy-sell agreements and their tax treatment are highly fact-specific. Before adopting, amending, or relying on any buy-sell structure, consult your own attorney and CPA.
Estate-tax figures, the Connelly case description, and structure comparisons are summarized from public sources cited above; they are not a substitute for the full opinion or professional counsel. Life insurance product availability, underwriting outcomes, and coverage amounts vary by applicant and state. Guarantees are subject to the claims-paying ability of the issuing insurer.
Sources for the Connelly v. United States summary
Connelly v. United States, 602 U.S. ___, No. 23–146 (June 6, 2024) (slip opinion). supremecourt.gov
Connelly v. United States, 602 U.S. ___ (2024) — syllabus & valuation figures. Justia. supreme.justia.com
Connelly v. Internal Revenue Service — procedural history & §2703(b). Cornell LII. law.cornell.edu
Business Buy-Sell Agreements In The Wake of Connelly v. IRS. Kitces.com. kitces.com
It’s Time to Revisit Buy-Sell Agreements After Connelly. Harris Beach Murtha. harrisbeachmurtha.com
2026 Outlook: The One Big Beautiful Bill Act & Permanent Estate Tax Exemptions. Harter Secrest & Emery LLP. hselaw.com
