C3 Financial Partners

Protected: Navigating Buy-Sell Agreements and Life Insurance in the Aftermath of the Connelly Decision

Buy-sell agreements are crucial tools in the realm of business continuity planning.  These agreements ensure the seamless transition of ownership interests in the event of a partner’s death, disability, or departure.

Typically, life insurance is an integral component of buy-sell agreements, providing the necessary liquidity to facilitate the transfer of ownership.  However, recent developments, particularly the Supreme Court decision in Connelly, have significant implications for these arrangements.

In this blog, we will explore the impact of the Connelly decision on buy-sell agreements and life insurance, offering insights into how business owners can navigate this new legal landscape.

At C3 Financial Partners we work with business owners and their advisors to help create business planning that provides continuity and peace of mind.

Understanding Buy-Sell Agreements

What is a Buy-Sell Agreement?

A buy-sell agreement is a legally binding contract among business owners that stipulates how a partner’s share of the business will be reassigned if that partner dies, becomes disabled, or otherwise leaves the business.  The agreement can be structured in several ways:

  • Cross-Purchase Agreement: In this arrangement, the remaining owners agree to purchase the departing owner’s share.
  • Entity-Level Agreement: The business entity itself agrees to buy back the departing owner’s share.
  • Hybrid Agreement: This combines elements of both cross-purchase and redemption agreements, providing flexibility based on circumstances.

To learn more about the various forms of buy-sell agreements, you can read our prior piece on the subject here.

The Role of Life Insurance

Life insurance plays a pivotal role in funding buy-sell agreements by providing the necessary liquidity at the moment it is needed.  The proceeds from a life insurance policy can be used to purchase the deceased owner’s interest, ensuring that the business remains financially stable and the deceased owner’s beneficiaries are compensated fairly.  This financial arrangement provides peace of mind to all parties involved, guaranteeing that the business can continue operating without financial strain.

To learn more about the role that life insurance can play in funding the provisions of a buy-sell agreement, you can read our piece on the topic here.

At C3 Financial Partners, we can often be heard saying “A buy-sell agreement is not a complete plan!” We work as a part of a client’s advisory team in evaluating which funding method is optimal for each client’s unique transition plan.

The Connelly Decision: A Turning Point

Overview of the Case

On Thursday, June 6th, the Supreme Court issued its decision in the case of Estate of Connelly v.  United States, which has an impact on certain buy-sell agreements.

The case involved brothers Michael and Thomas Connelly, who were the sole shareholders of a corporation.  The corporation had an entity level buy-sell agreement and had obtained life insurance on each brother so that if one died, the corporation could use the proceeds to redeem his shares.

When Michael died, the Internal Revenue Service assessed taxes on his estate, which included his stock interest in the corporation. According to the IRS, the corporation’s fair market value included the life insurance proceeds intended for the stock redemption.  Michael’s estate argued otherwise and sued for a tax refund.

The Decision

In a 9-0 decision, the Court held that “A corporation’s contractual obligation to redeem shares is not necessarily a liability that reduces a corporation’s value for purposes of the federal estate tax.”

In other words, the receipt of the life insurance proceeds increased the value of the company by the amount received, but the liability related to the share purchase obligation could not be considered to offset that amount for purposes of the estate tax calculation.

It is important to note that in its opinion, the Court highlighted that if the brothers had used a cross-purchase structure for their buy-sell, they would not have faced the same issue with the corporation’s valuation.  However, the Court recognized that this benefit might be offset by other aspects of a cross-purchase arrangement, such as the shareholders paying for the life insurance policies themselves.

Navigating the New Legal Landscape

Reviewing and Updating Existing Agreements

In light of the Connelly decision, business owners should promptly review their existing buy-sell agreements to ensure they comply with the new legal standards.  Key areas to focus on include:

  1. Valuation Clauses: Ensure that the valuation method is clearly defined and regularly updated to reflect the current market value of the business.
  2. Funding Mechanisms: Verify that life insurance policies are appropriately structured and designated for funding the buy-sell agreement.
  3. Tax Planning: Consult with tax professionals to understand the implications of the new ruling and optimize the agreement to minimize tax burdens.
Structuring New Buy-Sell Agreements

For those in the process of establishing new buy-sell agreements, it is essential to incorporate the lessons from the Connelly decision:

  1. Comprehensive Valuation Methods: Implement robust valuation methods that are periodically reviewed and adjusted to reflect the business’s growth and market conditions.
  2. Clear Designation of Life Insurance Proceeds: Clearly outline the use of life insurance proceeds within the agreement to avoid any ambiguity or misuse of funds.
  3. Proactive Tax Planning: Engage with legal and tax experts to structure the agreement in a tax-efficient manner, considering both the current laws and potential future changes.

Leveraging Professional Guidance

Given the complexities introduced by the Connelly decision, it is advisable for business owners to seek professional guidance.  Legal, financial, and tax advisors can provide invaluable insights and help navigate the intricacies of buy-sell agreements and life insurance funding.  Their expertise can ensure that the agreements are not only compliant with the latest legal standards but also tailored to the unique needs and goals of the business.

The decision is also a great reminder to periodically review your existing buy-sell arrangements and their funding mechanisms with your outside advisors.  The legal landscape surrounding buy-sell agreements and life insurance is continually evolving.  Business owners must stay informed about any changes in legislation or judicial interpretations that could impact their agreements.  Regular consultations with advisors can help anticipate and adapt to these changes.

The Role of Life Insurance Advisors

Life insurance advisors play a crucial role in the effective implementation of buy-sell agreements.  Their responsibilities include:

  • Policy Selection: Recommending suitable life insurance policies that align with the funding needs of the buy-sell agreement.
  • Regular Reviews: Conducting periodic reviews of the policies to ensure they remain adequate as the business evolves.
  • Claims Assistance: Assisting in the claims process to ensure timely and appropriate use of the proceeds for the buy-sell agreement.

At C3 Financial Partners, we coordinate with our clients’ other advisors to help ensure the creation, implementation, and execution of buy-sell agreements and funding mechanisms that meet the clients’ needs and desires.


The Supreme Court’s decision in Connelly has introduced significant considerations for buy-sell agreements and their associated life insurance policies.  Business owners must be proactive in reviewing, updating, and structuring their agreements to align with the new legal standards.  By leveraging professional guidance and adopting best practices, businesses can ensure the seamless transition of ownership and the financial stability necessary for continued success.  In this evolving legal landscape, diligent planning and regular reviews are paramount to safeguarding the interests of all parties involved.

At C3 Financial Partners, we look forward to helping our clients gain clarity in their goals and objectives, confidence that they are making the right decisions, and coordinating with their other advisors.




Securities offered through Valmark Securities, Inc. member FINRA, SIPC. Investment advisory products and services offered through Valmark Advisers, Inc., an SEC Registered Investment Advisor. Representatives may transact business, which includes offering products and services and/or responding to inquiries, only in state(s) in which they are properly registered and/or licensed.  C3 Financial Partners is a separate entity from Valmark Securities, Inc. and Valmark Advisers, Inc.

Any tax or legal related information contained is provided as general education and should not be considered a recommendation.  Further, you should seek specific tax or legal advice from your tax or legal professional before pursuing any idea contemplated herein.  This information is being provided solely as an incidental service to our business as a financial professional.

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